What happened to all the top mutual funds?
Markus Muhs - Oct 14, 2019
Whatever happened to the top-performing mutual funds of 1994? Would they have made good investments over the past 25 years?
Last month, while visiting my parents, I was rummaging through a bookshelf looking for my copy of The Intelligent Investor I lent to my father almost a decade ago, when I stumbled upon an absolute treasure trove of a book.
A treasure trove because it provides a glimpse back to a simpler time, 25 years ago, when my father couldn’t go online to read blogs to learn about investing, but actually had to go to a type of book depository building called a “book store” and purchase a paperback for $14.99 ($23.90 in 2019 dollars).
The book is comprehensive and well-written and overall provides some good advice at a time when the vast majority of Canadians were investing primarily via Guaranteed Investment Certificates at their bank (which were still yielding nice rates back then in the high single-digits). The core advice in the first pages was simply save and allow your investments to compound.
The rest of the book is like a time capsule, not only providing insight on tax rates and rules back in 1994 (like how “surtaxes” worked) but also a glimpse of the investment industry at the time, such as how to choose an investment advisor or brokerage. “There are thousands of people across Canada who are licensed to sell securities to the public. Some perform their duties superbly, while others are inept.” I guess some things haven’t changed.
Then the book gets into mutual funds… which I read with great interest, to see how different things were back then. Around that time Canadians had $100 billion invested in more than 750 mutual funds. Today, according to IFIC, mutual fund assets totaled over $1.76 trillion, and when I filter out all the duplicate fund series on Morningstar, I estimate there are over 3000 individual mutual funds. The book discusses how there are pretty much just two sales structures for funds: either you pay an upfront fee, or are subject to a deferred sales charge.
In the appendix of the book I found what would become the impetus for this blog post: an actual listing of all mutual funds in Canada with their past returns as of June 1993. It’s literally impossible to find this kind of info on the web today; I mean you can look up past returns of very long-lived mutual funds that are still around today, in hindsight we knowing which were the top-performers over the past 25 years. Here, however, was the list of funds and recent past performance available to an investor in 1994.
Smart investors know that you don’t base your investment decisions on looking at past returns, and the book tries to educate around this too. Undoubtedly though, people back then did, and many still do to this day put too much of a weighting on "track record". What if you were an investor in 1994 and just bought the funds with the best returns?
This required quite a bit more research than I originally thought, because one thing that became immediately apparent was that funds and fund companies changed hands and changed their names constantly throughout the past 25 years. I had hoped to do a comparison of the top 5 funds in the Canadian, U.S., and International equity categories, but what I found—especially in the U.S. and International categories—was that it was near-impossible to trace the lineage of many of the funds that were top performers back then. Some of the top global funds back then were “Bullock American” (U.S. parent shut down a few years later when Bullock died; no idea what happened to the fund), funds from General Trust of Canada (somehow this became part of National Bank), Talvest (part of Renaissance funds today), Sceptre (part of Canoe funds now by way of Fiera Capital). In other cases, funds were otherwise shuffled and merged within fund line-ups, making it difficult to track a fund’s lineage, especially when an older fund got merged into a younger one.
Anyway, I did manage to track down 9 of the top 12 funds that the book has classified in the “Canadian Equity” category. Note that several of these are actually Canadian small-cap mandates, but it’s interesting to see anyway if they managed to beat the TSX Composite index, as one would expect a smaller size factor to do. The list below also includes three funds for which I couldn’t find performance history, which again is symptomatic of the fact that you couldn’t simply invest in a fund and expect to hold it for 25 years.
Note that the list of funds is for information purposes only, chosen purely based on their 5 year annualized performance leading up to June 1993, according to the book and verified via Morningstar. They are by no means recommendations, nor are they being singled out for any other fact than that they were top performers in the past. The past 25 year performance numbers are compound annualized returns, courtesy of Morningstar Canada.
Also included above is the TSX Composite’s annualized total return for the period, and I shaded the performance number pink where the fund underperformed the TSX and green where it outperformed.
Obviously, this little experiment returned exactly the thesis that I expected it to: you can’t pick funds based on past returns. Not only that, but generally choosing the high performers led to below-average returns.
You can also do all the due diligence you want on a fund with an active manager, they might not be around for the full length of your investment strategy and even the fund company might not be around that long. Investors in the AIC Advantage fund, a good top-performer for years, saw their fund swallowed up by Manulife at some point and then terminated. Altamira, one of the early direct-to-investor fund companies had years of good performance and low fees before they got swallowed up by National Bank.
The Mawer fund above is really an odd exception and shows just how much luck-of-the-draw you would have needed in selecting that fund in the 1990s even to simply be an owner of the fund today. Today the fund manager (content to manage just a few hundred million dollars, not wanting the fund to get too big) won't even take your money, but in 1994 there's no way you could have picked that fund out of a bunch of top performers, knowing it would do as well as it did.
So, what does it all boil down to? The only way you can assure some degree of predictability in your investment portfolio is to stick with indexing, at least for the core of your portfolio. Not to say that indexing is any lower risk than using active managers, however there is an added non-systematic risk involved in choosing active managers; the risk that the active manager will significantly underperform. The TSX Composite’s annualized 8.07% over the past 25 years (don’t forget, that includes the Nortel implosion and several commodity crashes) was perfectly reasonable and fitting with the projections used in financial planning. 4.6% annualized could have blown a gigantic hole into your retirement plan.
Note: Header picture is my own, taken from the CN Tower in November 2007. 90% of Canada's mutual fund managers pictured.