You Get What You Pay For

There is a huge shift taking place at the moment from actively managed mutual funds to passive ETFs (exchange traded fund). The reported reasons for this are cost and performance.

Mutual funds are considered expensive relative to the lower MERs (management expense ratio) of ETFs and since performance statistics suggest that very few mutual fund managers beat the market index, why not own the index instead.

We have a slightly different view on this debate because price should be a secondary consideration to performance and market index is far less important than a personal benchmark.

In choosing an active fund manager, we look for tenure, consistency and peer group ranking. In other words, we hire managers based on how long they have been managing that particular fund with the same style, approach and philosophy, and where they rank among their peers who manage funds in the same market and asset class.

In choosing an ETF, we take a more tactical approach aiming to capture the upside of a particular index performance we want (less the friction of trading costs and management expenses).

Is one better than the other? While there are advantages and disadvantages with each, we believe that you need both to manage the risk associated with the financial markets.

The advantage of a top performing mutual fund manager is in the upside/downside capture ratio of the underlying benchmark index. We look for a manager that is willing to give up a bit that upside to protect assets from the full downside of the market. In other words, a manager who may be slowed down by carrying a parachute on his or her back on the updrafts but can deploy it if necessary on the inevitable downdrafts to maintain some altitude until the next updraft. …like gliding.

Passive investing on the other hand is far less gentle – vaulting upwards before tumbling back toward the ground. It is this gut wrenching movement that scares most investors who cash in too early or bail out too quickly, losing sleep along the way.

Our job is too smooth out this movement by paying more attention to the personal benchmark performance we are trying to achieve and building a portfolio embracing both disciplines in the process.

David J. Angas
Senior Vice President, Financial Advisor
Family Wealth Counsel Advisor Group/Raymond James Ltd.

Family Wealth Counsel is a financial advisory group with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This commentary is for information only. Raymond James Ltd., Member - Canadian Investor Protection Fund.