The RRSP Portfolio War

A little over a year ago I changed my plan for how I was investing my RRSP portfolio. At first I was just in some managed mutual funds, but now I’m fully over to using just index funds (equally split with bonds, Canadian index, S&P 500 index, and an international index). My wife’s portfolio on the other hand is still setup with the same old managed mutual funds. We decided to leave it for a while and find out who was doing better.

So far I have to say I’m getting my butt kicked.  My wife’s portfolio has out paced mine by 3% so far this year.  This result surprised me a little at first, but then I looked into more.  Now at least I know mostly why this is.  Her portfolio is completely in Canadian investments and she also has the habit of building up a larger pile of cash prior to investing it.  So when the market did one of its dips this year she took advantage of it and dumped in her cash in.  Basically she ended up market timing a bit while I just invested $100 here or there all year long across four different index funds.

In either case the results are still valid to some degree, she had a different style and beat me so far.  Yet it also points out a weakness to me on my wife’s portfolio, it has little diversification.  If the Canadian index crashes, so do most of her results.  So going forward I think she will keep some of her managed funds, but also add a few others to round out her exposure to different markets.

In the end I have to admit some managed funds are worth owning.  If they can consistently beat the market for long periods of time they might just be useful in a portfolio.

14 thoughts on “The RRSP Portfolio War”

  1. I have to admit that my RRSP is in managed funds so far: a Canadian equity, a Canadian income (bonds, T-bills and dividend-yielding stocks), and a Global Equity. I’m planning on starting in on index funds next. I think I see management vs. index as one more stratum to diversify across. Finding a balance between limiting my exposure to fees/loads and keeping possible managed protection from straight market fluctuations.

  2. Good point – really you are comparing asset allocation as opposed to comparing active vs passive investments.

    How have her funds compared to index funds allocated to match her “active portfolio allocation”?

    Also, the market timing issue: if there is a LONG series of positive months before a “correction” then the market timer (assuming they are just stashing their monthly contributions waiting to invest) will come out BEHIND as the lack of participation in the bull run-up will factor in.

    For example, if the market kept going up (or was even flat some months) from (TSX) 11,000 to 14,000 but there was a correction of 1,400 points (10%) once it got to 14,000 you would have been better off as your ACB would be half the sum of 11,000 and 14,000, while the other person would be buying in at 12,600.

    In the end, I think YOU are doing all the right things, but short term gyrations and the different asset allocation has worked in your wife’s favour for the last year.

    Of course we can only say this based on history. If the Canadian market outperforms the world for the next 50 years, then your wife’s going to win! 🙂

    Also regarding your comment on managed funds – I do believe there are some out there worth owning. Especially in Small Cap mandates as I think a manager can truly and more easily add alpha in that space. Given the high failure rate of newer businesses, hiring someone to sift through all the small cap companies to get rid of the obvious dead weight may make good sense.

  3. There are two problems with picking a managed fund:

    1. The odds are against you. Only one in four fund beats the index in an average year. Over the long term it is even less. Why bother?

    2. There is no way to tell which fund will beat the index and past performance is next to useless because it doesn’t persist.

    I don’t buy the argument that you can find active funds that add value in so-called “less efficient” markets like small caps or foreign markets. Is there any study that shows that you can consistently pick the winning fund in such markets? If you do, I’d love to see it.

  4. Ok Preet kind of beat me to it…

    I also went more passive this year and my new ETF portfolio has not done anywhere near as well as the old managed fund portfolio but as Preet points out, that’s because my old portfolio was mostly Canadian equity which has continued to do well, whereas the new more diversified portfolio has not done as well. Over the long term however, I’d rather have the more diversified portfolio.

    CC – I agree – very few managed funds beat the index and almost none of them can do it for the long term.


  5. CC makes a really good point. After all, these are your retirement portfolios so the 1-yr returns will be irrelevant by the time you’re drawing down.

    There is a very high probability that you will come out ahead in ~15 years…when it actually matters!

  6. I completely understand the logic behind your argument, but then why would you ever buy individual stocks to add to your portfolio of indexed products? If I’m not mistaken you do add the odd position or two, do you not? Is that not an “active” strategy?

    What about Warren Buffett’s Berkshire Hathaway stock? Is that not actually a managed fund? Would his performance not indicate that active management can outperform an index over long periods of time?

    Don’t get me wrong, I fly the flag of the virtues of low-fee indexed products as much as any of you – and I hardly use mutual funds at all. So I belong on your side of the overall argument.

    As for a study that shows you that anyone can consistently pick a winning fund – it will probably never happen, and most Canadians (especially) will continue to be hosed by the financial services for decades to come through mutual fund over-pricing and under-performance.

    It is POSSIBLE to pick a winning fund? Yes. And for those who know about the argument between active and passive, but still choose to pick active in some cases (or for part of their portfolios) – I believe they do it for the same reason an indexer would choose to add individual stocks to their mostly indexed portfolio – because there is the chance that they can do better.

    If I do recall correctly, and you DO purchase individual positions, would you agree? If not, I would be curious as to the rationale…

  7. Wow, those are some excellent comments. I think I’m going to need a new post to answer/address all of this.

    I guess I know what I’m writing about on Wed.


  8. The reason why most active funds under perform the benchmark is because 75% of them are closet index funds. I like to call them over priced index funds.

    It’s possible to improve the odds of picking winning funds through the process of elimination:

    1) You know closet index funds are almost guranteed to trail the index.
    2) You can shiftly identify closet index funds by examining their top holdings to ensure they don’t mimick the index.

    One of my favourite active funds is RBC O’Shaughnessy Canadian Equity.

    Further reading:

  9. Preet: Berkshire Hathaway is not a mutual fund. BRK has significant business holdings and Buffett has influence on management of many of his stock holdings. I’ll readily admit that there are a few investing gods but the vast majority of us won’t succeed in beating the index or finding someone who does.

    I’ll explain why I plan to keep some individual positions in a post but I’ll say that I have no illusions that I’ll do better than the index and I’m okay with that.

    FJ: I don’t know what the odds are after you filter out the closet index funds but it’s still less than even. Let’s do a thought experiment:

    1. Index funds and all closet index funds taken together track the index before expenses.
    2. Among the assets in the rest of the funds, half the money does better than average, half less before expenses.
    3. After expenses, less than half of the non-closet index funds did better than average.

  10. CC: Don’t forget that closet index funds also have expenses, sometimes even more than a selected few non-closet index funds.

    For example, RBC Canadian Equity charges 2.42% while O’Shaughnessy Canadian only 1.51%.

    The first step is to eliminate closet index funds. This is just a starting base…

    Secondly, even if about half the active funds under perform the index/closet index combo, it’s still possible to compete well against other mutual fund investors. As we know, unsophisticed retail mutual fund investors are notorious performance chasers, and not very analytical. My own co-worker literally said that he bought his RRSP mutual funds based on last year’s performance. (I kept my mouth shut.)

    Not many relish a steller 10+year performance, know what R-Squared is or understand the funds’ investment philosophies. I’m not saying we can beat them this year or next, but over the long-term, odds are in our favour if we do our homework.

  11. CC, you raise a interesting point. While BRK is not a mutual fund, it IS an actively managed portfolio. Since the original textile company is no longer, Berkshire Hathaway is nothing more than a holding company really – and it holds investments picked by a manager.

    Some would argue that GE is like owning a mutual fund as well given all the companies under the same umbrella (in different sectors as well).

    One of the hurdles that mutual funds have is the restrictions on how much a position can represent of their overall holdings, and how much of a particular company they can own. BRK doesn’t have these limitations since it is not a mutual fund.

    I think you are being modest – I’m pretty sure a guy like you CAN beat the index with your individual positions! 🙂 I look forward to your post.

    As for me, if I own XIU then I’m adding individual bank positions on top of that when their yields starting heading to uncharted territory on dips (I’m thinking long and hard about CIBC right now though as if ever there was a cut in dividends from a bank – it might be them – they always seem to get their hands the dirtiest in any banking-wide fiasco! 🙂 ).

    Also, if I’m adding individual positions, it’s because I’m prepared to own the stock as a long term position, BUT my entry will be on a deep value basis and I’m happy to exit if I get a double digit return in less than 2 weeks. If the stock doesn’t move or if it goes down further – I’m happy to hold.

    So while I don’t look for quick gains – I’m happy to take advantage. Most years this means I don’t have much activity – but this year: tonnes and it has done me well – no doubt partly due to luck, but when you are buying a top company whose dividends are higher than a high interest savings account – it’s usually not long before there’s a move in stock price to exploit that – and that means the stock has a higher likelihood of going up as opposed to down. Of course there is a LOT more risk to undertaking such a strategy – but I’m happy to take this risk with a small portion of my portfolio – certainly not all though.

Comments are closed.