Why U.S. equity funds in Canada are so lousy

Costs, incentives and resources are possible factors behind the category's weakness.

Christopher Davis 26 July, 2016 | 5:00PM

Active management is usually a tough game to play anywhere, but the S&P 500 has been an almost unbeatable foe for active Canadian managers who run U.S. equity funds.

To be sure, the S&P 500--the most widely-used bellwether of U.S. market performance--has been a difficult opponent for U.S. stock fund managers everywhere. Because the index is home to some of the world's most widely followed and liquid companies, such as  Apple (AAPL),  ExxonMobil (XOM) and  General Electric (GE), stock prices quickly reflect new information, which makes it hard for active managers to gain an edge. The index also can be prone to extended stretches where a small number of constituents, including  Amazon.com (AMZN) and  Facebook (FB) more recently, dominate returns. When success relies on getting a handful of calls right, active managers will have a harder time differentiating themselves.

Active U.S. equity managers in the Canadian market have stood out, but not in a good way. Through May 2016, just two of the 66 active funds (or 3%) in the U.S. Equity category that have 10-year records outpaced the S&P 500 Index over the period. Only one fund--Beutel Goodman American Equity--delivered better volatility-adjusted results than the index after fees. (Our calculations exclude multiple versions of the same fund, as well as index funds and those that hedge their currency exposures.) Active U.S.-domiciled large-cap managers don't exactly shine either, but with 28% of funds with 10-year records beating the benchmark, they've performed better than their Canadian counterparts.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc2,472.41 USD0.06
Apple Inc323.34 USD0.46
Exxon Mobil Corp47.31 USD2.23
Facebook Inc A232.72 USD0.35
General Electric Co7.05 USD4.29

About Author

Christopher Davis

Christopher Davis  Christopher Davis is Director of Manager Research at Morningstar Canada.

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