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Don’t bet against time with actively managed mutual funds

You might think you’ve found a winner. It might beat the index over a three, five or 10 year period. But the index is much like time. Eventually, it wins.

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Andrew Hallam is the index investor for Strategy Lab. Globe Unlimited subscribers can view his model portfolio here and read more in the series online here.

Rocky Balboa probably said it best. In his 2015 movie, Creed, Sylvester Stallone's character identified every boxer's nemesis. Time.

"Time takes everybody out. Time's undefeated."

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It's much the same with actively managed mutual funds. You might think you've found a winner. It might beat the index over a three, five or 10 year period. But the index is much like time. Eventually, it wins.

The SPIVA Canada Scorecard says the S&P/TSX composite index beat 91.11 per cent of actively managed Canadian equity funds over the 10 years ended Dec. 31, 2016. The S&P 500 beat 98.28 per cent of U.S. equity funds sold in Canada. The Global stock market index beat 96.4 per cent of actively managed global stock market funds.

Sometimes we're tempted to search for winning funds. But that's a quest in vain. Take the Thomson Reuters Lipper Fund Awards. Each year, they award top-performing funds. Time, however, has the final laugh.

For example, in 2013 the RBC O'Shaughnessy All-Canadian Equity Fund was Lipper's top Canadian equity fund. It had the industry's best three-year track record. After it won the award, plenty of new investors piled into its corner. But the following year, TD's Canadian stock market e-Series index beat it by almost seven percentage points. RBC O'Shaughnessy All-Canadian Equity Fund earned 3.56 per cent. TD's Canadian Index e-Series index earned 10.23 per cent.

In 2014, the Lipper Fund Awards gave top honours to the new three-year Canadian equity champ. It was the Phillips Hager & North Vintage D fund. New investors jumped on board, putting their money on a winner. But the following year, that fund lost 9.6 per cent. TD's Canadian e-Series Index dropped just 8.53 per cent.

In 2015, Mawer's Canadian Equity Fund Series-A took Lipper's top three-year honours. One year later, it gained 15.77 per cent. TD's Canadian e-Series Index gained 20.63 per cent.

The Canadian Lipper Fund Awards began in 2007. That year, they awarded Dynamic Mutual Funds the top equity fund performer. Dynamic won the award based on their overall performance. But time has hit them hard since then.

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Dynamic's Canadian equity funds with 10-year track records averaged 1.23 per cent for the 10-year period ended April 30, 2017. Inflation in Canada averaged 1.61 per cent. That means your grocery bills rose higher than Dynamic's Canadian equity funds.

In the United States, there's at least one firm that boasts they can beat the index. It's called American Funds. The company's website shows that five of its actively managed funds trounced the S&P 500 between 1976 and 2016. It says, "So the next time you hear 'You can't beat the index,' consider American Funds' long-term track record."

Unfortunately, they're boasting from the canvas as they remember better days. After fees, Vanguard's Total Stock Market Index (VTSAX) knocked them out over the past one-, three-, five-, 10- and 15-year periods.

Investing with index funds is like betting on time itself. Time is undefeated.

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