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Year-End 2018 Canada SPIVA: Challenging 3 Active Vs. Passive Misconceptions

May 02, 2019 4:18 AM ET
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  • The latest Year-End 2018 Canada SPIVA scorecard was released recently.
  • It showed that the majority of Canadian active equity managers failed to outperform their benchmarks.
  • In addition, the scorecard's results provide the opportunity to dispel some common misconceptions.

By Hamish Preston

Our Year-End 2018 Canada SPIVA scorecard was released today. In addition to showing that the majority of Canadian active equity managers failed to outperform their benchmarks, the scorecard's results provide the opportunity to dispel some common misconceptions. Here is a brief summary.

1) Higher volatility does not necessarily result in outperformance by active managers

A common view among market participants is that more volatile markets favor active management over passive solutions. However, in a year when Canadian equities were caught up in global equity gyrations, 75% of Canadian active equity managers underperformed in 2018, as the majority of funds lagged in all categories.

Such underperformance by active managers in more volatile environments is consistent with other international regions, and perhaps speaks to a bias many active managers have for higher-beta stocks. Indeed, these stocks are expected to be more heavily impacted by market corrections.

2) Smaller-cap stocks may not be better suited to active management

Another popular perception is that small- and mid-cap stocks are inefficient asset classes that are more suited to active management. However, 80% of all small- and mid-cap managers failed to beat the S&P/TSX Completion (-12.85%) in 2018, suggesting they struggled to navigate the market turbulence as the equity benchmark recorded its worst calendar-year performance in a decade.

In fact, only once in the last eight calendar-year periods did the majority of small- and mid-cap managers beat the S&P/TSX Completion. Hence, using an index-based approach to access smaller Canadian companies would have been beneficial historically.

3) Get what you pay for? Not necessarily!

In many walks of life, we are told that the cost of something is proportional to its quality. But while some investors may believe higher-fee funds are illustrative of higher-quality managers - as measured by their ability to outperform benchmarks - the data does not reflect

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