Dec 29, 2017
Personal Investor: How to build your own Canadian equity mutual fund
By Dale Jackson
One of the easiest jobs on Bay Street is managing a Canadian equity mutual fund. While U.S. and international fund managers need to sift through countless financial statements to find the best of the best, there are only a few blue-chip Canadian stocks to choose from.
Everyone knows them: the big banks and insurance companies, energy and mining firms, two rail companies, telcos and a few big manufacturers and retailers. Roughly one-third of all TSX-listed companies are financials and another third deal are in resources.
Those stocks are reflected in the S&P/TSX Total Return Index according to their size. Including dividends, the index returned nine per cent in 2017. Yet, the overwhelming majority of Canadian equity funds underperformed the index. A few beat it on a regular basis, but the average Canadian equity fund has underperformed the index by nearly two per cent annually for at least twenty years.
Curiously, the one thing most unrestricted Canadian equity funds have in common is an annual fee above two per cent subtracted from the total return. If you add the fee - called the management expense ratio (MER) - to the annual return, most actively managed Canadian equity funds at least match the index.
More curiously, the top holdings in those funds often bear a striking resemblance to the index. It’s hard to be certain because mutual fund companies are not required to disclose all their holdings, or when they buy or sell them.
Here’s some food for thought if you’re looking for a new year’s resolution: a typical MER of 2.5 per cent on $100,000 in a mutual fund translates to $2,500 in fees each year. You can pay a fraction of that fee by investing in an exchange traded fund (ETF) that tracks the TSX according to market weight.
…or you can create your own Canadian equity fund in your trading account by following two easy steps:
1. Buy the stocks in proportion to their market caps.
2. Monitor and rebalance on a regular basis.
Happy New Year.
