Actively managed Canadian equity and small-cap funds lagged benchmark indices in the first quarter of 2007, according to Standard Poor’s Cop.’s Indices Versus Active Funds Scorecard for Canada. Only 47.7% of Canadian equity funds outperformed the S&P/TSX composite index and just 47.6% of small-cap funds outpaced the S&P/TSX small-cap index. U.S. equity funds fared better, with 57.6% of funds in this category outperforming the S&P 500 index.

“Looking over longer time periods, indices continue to outperform a
majority of active funds,” said Steve Rive, vice president of Canadian index services at S&P. “Over the last five years, just 10.2% of actively managed Canadian equity funds have beat the S&P/TSX composite index.”

In the same five-year period ended March 31, only 14.1% of U.S. equity funds outpaced the S&P 500 index, while 49.3% of actively managed Canadian small-cap funds outperformed the S&P/TSX small-cap index.

Five-year average fund returns to the end of 2006 show active funds underperformed both the S&P/TSX composite index and the S&P/TSX capped composite, both on an equal- and asset-weighted basis, by roughly 300 basis points.

A key attribute of the SPIVA methodology is its correction for survivorship bias, which can significantly skew results as funds liquidate or merge. The five-year survivorship is 62% for the Canadian equity and 64% for the Canadian small-cap mutual fund categories, meaning that over one-third of funds in these categories has merged or liquidated in the past five years. For the U.S. equity fund category, during the same period, survivorship is only 41%. In other words, out of the total funds in this category that existed five years ago, less than half remain today.

The SPIVA methodology is designed to provide an accurate and objective apples-to-apples comparison of funds’ performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry. SPIVA scorecards show both asset- and equal-weighted averages and include survivorship bias correction to account for funds that may have merged or been liquidated during the period under study. Fund categorizations are as defined by the Canadian Investment Funds Standards Committee, and fund data is drawn from Fundata’s mutual fund database.

S&P issues the SPIVA scorecard for Canada.