Over three-quarters of Canadian mutual fund managers failed to outperform their benchmark index in 2023, despite it being a bullish year for the stock market. This underperformance is even more widespread over the long term: 9 out of 10 Canadian managers don’t surpass their benchmark over five years or more.

How can we account for this underperformance? Yannick Clérouin, portfolio manager and partner at Medici, and Tania Strebel, associate portfolio manager, delve into an annual study in this video clip.

The analysis, conducted by Standard & Poor’s, compares the performance of Canadian mutual fund managers to their benchmark index over short, medium, and long-term periods.

The primary goal of the study is to determine whether it is better to invest passively or actively.

Yannick and Tania discuss the factors, cited in the study, that help explain why mutual funds are mostly lagging their benchmarks:

• Concentration of gains in a few stocks: A small handful of stocks, including Shopify in Canada, contributed significantly to the benchmark’s performance in 2023, penalizing funds that did not hold them.
• Survivorship bias: The study includes all existing funds over the periods studied, even those that disappeared along the way. This approach provides a more accurate picture of long-term performance, as the mutual fund industry regularly eliminates underperforming funds.
• High management fees: High management fees undermine mutual fund performance after fees.
• Closet indexing: Many mutual fund managers try to closely follow the benchmark without deviating too much, which greatly limits their potential for outperformance.

Watch this video to learn more about the study and for our managers’ tips for investors.