Do You Still Invest In Mutual Funds? | Your stories | Discussion forum

Not a very good article.

Closet indexing is easy to spot. Just look at the performance compared to the index. If performance has been consistenty been same as the index return minus expenses, then it is likely a closet index fund.

One can't tell by looking at the list of stocks held. It is not closet indexing if manager holds the same stocks as the index but with different weightings. PH&N explained that to us unitholders around year 2000 when the dot-com bubble burst.

One unitholder asked why there was even any Nortel shares in the Canadian PH&N stock funds. The answer was their funds will always hold all the stocks in the benchmark index regardless. They try to outperform by holding more of the winners and less of the laggards.

One is also not going to have access to "best advisors" who "are qualified to invest in anything; mutual funds, ETFs, stocks, bonds, options and more" until one has at least $500,000 to $1 million to invest with them. Such advisors are not going to charge ½% per annum management fee either.

InterestThis said
nope, although some ETF's are sneaky with their fees.  

How so? ETFs are straight up with their MER disclosures in their fund facts. It is the investor's fault if they pick 'boutique' ETFs with high(er) MERs to draw in more fund sponsor revenue. Mainstream index ETFs have rather low MERs, some sub-10bp and many under 20bp. VTI (US domiciled) MER is 3bp. XIU for the TSX/S&P60 is 18bp.

Those are peanuts compared to a mutual fund MER.

Spotting a closet index fund, let alone proving it, by comparing performances is very tricky.

An active manager might legitimately choose to track one index or another for a few years. Closet trackers always pick a few small bets here and there which shows in the performance. Market conditions may mask active bets.

The one and only way to be certain that its a closet index is by having composition data over long term.

Question: Why are there no mutual funds that show a negative return over a 5 year period?

Answer:

mordko said

Lots. Income funds in particular.  

I'm surprised/shocked it's "lots".

Usually, mutual fund managers kill the losers and wind-up loser funds. Nobody likes to have losers hanging around. Bad publicity.

It is all about the big banks and people had no options. Now with disruptors like Questrade etc. their share will start reducing and the newer generations will not use the big banks but it will take time. They can easily invest in Stocks and ETFs now.

COIN said

I'm surprised/shocked it's "lots".

Usually, mutual fund managers kill the losers and wind-up loser funds. Nobody likes to have losers hanging around. Bad publicity.

Fund managers don't kill or wind-up funds just because the fund had a bad 5-year rate of return. The managers terminate funds that don't attract enough money to invest.

There aren't that many funds with a negative return over the last five years because the last five years have been good. For example, total return from S&P 500 is about +95.6% for start of 2020 to end of 2024. TSX 300 total return is about +69.1% for the same period.

"There aren't that many funds with a negative return over the last five years because the last five years have been good. For example, total return from S&P 500 is about +95.6% for start of 2020 to end of 2024. TSX 300 total return is about +69.1% for the same period."  

Question: How many fund managers did better than the index? If they can't beat the index, then just buy the index.

COIN: Investment companies don't let negative performance, or substandard performance relative to their market competition, lie around to be seen for long. This means crummy funds are usually renamed, wound up or merged into better ones.

Do investments get terminated more by cash flight rather than return? Sort of an academic question, as investors can flee the coop either before or after the fund managers react.

Unmanaged index funds continue to be one of the best bets for equity investors. But picking the right mix of them remains a quandry.