The top mutual funds have trounced the Canadian index this year, which again opens up the debate of whether active management can outperform a passively managed portfolio after fees. Fans of passive investing say it’s nearly impossible to beat the market over the long term, and equally as difficult to pick the investments that will outperform in the future.
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Past performance doesn’t guarantee future results, and much research shows that the mutual funds which performed best in the past have tended to under-perform in the following years, eventually reverting back to the mean. Couple that with mutual fund fees that are among the highest in the world and you can see why most investors are better off taking a passive approach with low cost index funds and broad market ETFs.
Market beating funds do exist, but you’re not likely to find one among your banks’ list of funds. Instead, some of the top mutual funds are managed by large, private investment firms like Mawer, Beutel Goodman & Company, Steadyhand, and Leith Wheeler.
I went to Morningstar to find mutual funds with a track record of beating the index. After sorting through 775 Canadian equity funds, including 70 that have been rated five-star funds by Morningstar, I settled on these three mutual funds that have topped the Canadian index over the last decade.
Index beating mutual funds
| Year | Beutel Goodman | Mawer | Leith Wheeler | ishares XIU |
| 10-year return | 8.91 | 10.70 | 9.41 | 8.22 |
| 5-year return | 12.78 | 15.20 | 12.87 | 8.23 |
| 2013 (YTD) | 21.66 | 22.77 | 19.55 | 10.21 |
| 2012 | 10.77 | 12.67 | 13.61 | 7.87 |
| 2011 | -6.99 | 1.90 | -6.24 | -9.23 |
| 2010 | 15.52 | 13.74 | 15.42 | 13.60 |
| 2009 | 24.11 | 29.45 | 27.54 | 31.50 |
| 2008 | -22.87 | -29.68 | -32.87 | -31.08 |
| 2007 | 5.27 | 11.50 | 8.87 | 10.93 |
| 2006 | 15.12 | 13.94 | 17.55 | 18.93 |
| 2005 | 16.18 | 20.60 | 19.35 | 25.94 |
The mutual funds were compared with XIU, the iShares Canadian equity ETF with a MER of just 0.15 percent. I used the ETF because you can’t actually buy the index, but you can buy a fund or an ETF that tracks it.
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All three funds have handily beaten the index this year, with two of the three funds more than doubling the index. They’ve also shown staying power by outperforming the index over the last 10 years. Mawer’s fund has been the most impressive, outperforming XIU by a healthy 2.5 percent after fees.
About the funds
Beutel Goodman Canadian equity fund invests in established Canadian companies, typically holding between 35 and 45 stocks. The fund has a MER of 1.36 percent and manages over $4 billion in assets. You’ll need to invest a minimum of $5,000 to start, and additional contributions can be made for as low as $100.
Leith Wheeler Canadian equity fund uses a strong value bias to pick its investments, meaning it tends to include companies in its portfolio that are currently out of favour. The fund has a MER of 1.57 percent and manages $1.7 billion in assets. Minimum investment is $25,000 directly through Leith Wheeler, or $5,000 through a registered dealer. Subsequent contributions can be made for a minimum of $1,000.
Mawer Canadian equity fund seeks above average, long term, risk adjusted returns from a portfolio of mid-large cap Canadian stocks. The fund has a MER of 1.21 percent and manages nearly $1.5 billion in assets. Minimum investment is $5,000 per fund, per account.
Final thoughts
Mutual fund companies are quick to point out when their funds outperform, but the fact is the vast majority can’t do it consistently and over the long term. I’ve identified three funds out of a possible 775 that have managed to beat the S&P/TSX 60 Canadian index over the last 10 years. There was no way to tell which ones would outperform back then, just as we can’t tell if these ones will continue to beat the index in the future.
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But the two distinguishing traits that give these index beating funds a good chance to succeed in the future are their relatively low costs (between 1.21 and 1.57 percent) and their simple investment strategies that minimize turnover and emphasize large, blue chip companies.
Passive investors may have taken their quest too far in admonishing all actively managed strategies. I’ll give credit where credit is due and acknowledge that there are well managed mutual funds available that can consistently beat the index and that don’t charge outrageous fees to do so.
