Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
Post Reply
User avatar
always_learning
Contributor
Contributor
Posts: 530
Joined: 01 Mar 2005 21:44
Location: Halifax

Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by always_learning »

In 2016, Mercer delivered a PowerPoint presentation to the University of Ontario Institute of Technology Pension and Benefits Committee which stated that, over the five years prior to March 16, 2016, the S&P/TSX Composite Index returned only 0.90% per year, placing it in roughly the 10th percentile of something called the "Mercer Pooled – Canadian Equities (PFS) universe." Over the 15 years prior to December 31, 2015, the S&P/TSX Composite Index is in only the 6th percentile of the Mercer Pooled - Canadian Equities (PFS) universe. According to Mercer, “the S&P/TSX Composite Index has generally been outperformed by active management.”

Yet the SPIVA Canada Scorecard for mid-year 2016 states just the opposite: “Over the five-year period studied, 28.77% of actively managed funds in the Canadian Equity fund category outperformed the S&P/TSX Composite.” Furthermore, finiki’s page on passive investing notes that this was true for the previous five years, too: for the five years prior to 2010, only 1% of actively managed Canadian equity funds beat the S&P/TSX Composite Index. In other words, active management has generally underperformed the S&P/TSX Composite Index.

Can anybody explain this discrepancy for me? Is there some difference between the SPIVA universe of funds and the Mercer universe of funds?

As a result of the Mercer presentation, the UOIT Pension and Benefits Committee dropped the BlackRock S&P/TSX Composite Index Fund in favour of the CC&L Group Canadian Equity Fund, an active fund that has had above-average return and risk/return numbers over the past 15 years.

My brother-in-law, a faculty member at UOIT with contacts inside their Pension and Benefits Committee, reached out to me. Do any of you know anything about the Mercer Pooled – Canadian Equities (PFS) universe? In particular, I would like to educate the Committee about it. Is it an appropriate benchmark for S&P/TSX Composite index funds? I had never heard of it before and can’t seem to find it on the internet.

Thanks in advance.
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13267
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by Peculiar_Investor »

always_learning wrote: 11 Apr 2017 13:36 Can anybody explain this discrepancy for me? Is there some difference between the SPIVA universe of funds and the Mercer universe of funds?
Yes there is a difference. Typically these pooled fund universes are funds specifically marketed to the pension/institutional universe.

I don't know about the Mercer universe, but Morneau Shepell (yes that Morneau) is another major player in this pension advisor/consulting space. If you want to look at a current report, read Performance universe of pension managers' pooled funds as at December 31, 2016.

From my limited experience/exposure to this space, there is overlap with the managers who provide retail mutual funds and/or ETFs. A number of the managers have little to no retail exposure, they only service the pension or institutional space.

The pension consulting business where the likes of Mercer and Morneau Shepell operate is big business. Buffett talks about them in his 2005 Letter, page 18. His story of the Gotrocks and their "Helpers" is well worth the read and might help understand this situation. The bottom line is that the pension and benefits committee gains some safety for their own job because they've followed the advice and best practices of their consultant, aka Buffett's Helpers and hyper-Helpers.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
twa2w
Veteran Contributor
Veteran Contributor
Posts: 2054
Joined: 22 Feb 2005 13:08

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by twa2w »

A couple of other points worth noting.
The pooled funds usually have very low fees so active pooled managers have a better chance of matching or beating the market as compared to mutual funds.
Pooled funds for pension plans don't hold much cash as a rule as they know exactly how much is coming in/ out each month so limited drag on performance compared to a mutual fund.
Typically pooled funds hold more and bigger dividend players versus the index and mutual funds ,and these names have generally performed better in Canada over the last number of years. So not likely comparing to the right bench mark.
Pooled managers can take a longer term approach than say mutual fund managers as they don't have the same emphasis on quarterly performance, thus perhaps less trading to look good for quarterly reports.
So if you took away 80%, of the fee and the cash drag, a lot more mutual fund managers would show as beating the index.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by DanH »

twa2w wrote: 11 Apr 2017 15:00So if you took away 80%, of the fee and the cash drag, a lot more mutual fund managers would show as beating the index.
I think this is key. And I'd say most pooled funds quote performance gross of fees (i.e. zero fees) since they are negotiable in the institutional world. As noted, a good majority of active managers have outperformed benchmarks over longer periods of time - when comparing both on a gross-of-fee basis (I touch on this in an older article of mine. Incidentally, the comparison I did for that article included a broader universe - i.e. mutual funds, pooled funds and managers that only manage separate accounts and offer no pool/fund.)

I would add that when you look at institutional fees for active management and what they passive/index alternative costs, there is a much smaller cost difference. And, to twa2w's point, if you've eliminated most of indexing's main benefit then it becomes a much different discussion than happens in a standard retail context.

By comparison, the SPIVA Canada reports focus only on Canadian-domiciled retail mutual funds (excluding pooled funds; low fee versions of standard retail funds). And if S&P really wanted to make their SPIVA reports more meaningful (at least for Canada) I shared thoughts in another piece opining on how they could do just that.
User avatar
ghariton
Veteran Contributor
Veteran Contributor
Posts: 15954
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by ghariton »

Peculiar_Investor wrote: 11 Apr 2017 14:40 I don't know about the Mercer universe, but Morneau Shepell (yes that Morneau) is another major player in this pension advisor/consulting space. If you want to look at a current report, read Performance universe of pension managers' pooled funds as at December 31, 2016.
Thank you for the link.

That appears to be a brochure with information extracted from the Morneau Shepell report. Presumably the full report is for sale or for subscribers only.

Unfortunately the brochure does not describe the benchmarks used, other than the equity/fixed income mix. I was wondering whether they are mutual funds or ETFs or the indexes themselves. The expenses would be different in each case.

As well, thanks to DanH for linking to previous articles by him. If the difference in expenses between active and passive funds for very large portfolios is only 0.3 % per year, I fail to see how the results quoted by always_learning obtain. I suspect that the index used in the presentation cited by always_learning may lead to an inflated expense ratio for passive funds.

It seems to me that the better methodology is to pick an independently designed and measured index, and then compare various proposals to it, whether active or passive, index or hand-picked. I deeply distrust the use of proprietary benchmarks, especially if there has been no opportunity to examine how they are constructed and implemented.

George
The juice is worth the squeeze
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by longinvest »

I share George's suspicion about proprietary benchmarks because beating the market is a zero-sum game, before fees.

The Arithmetic of Active Management
William Sharpe wrote:Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.
Of course, the above proof only applies to the aggregate of actively and passively managed dollars. It allows for some active fund managers to actually beat the market, but only at the expense of other active fund managers and/or active retail investors. It just cannot be otherwise.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
User avatar
Norbert Schlenker
Veteran Contributor
Veteran Contributor
Posts: 7960
Joined: 16 Feb 2005 09:56
Location: An Argument Surrounded By Water
Contact:

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by Norbert Schlenker »

always_learning wrote: 11 Apr 2017 13:36 In 2016, Mercer delivered a PowerPoint presentation to the University of Ontario Institute of Technology Pension and Benefits Committee which stated that, over the five years prior to March 16, 2016, the S&P/TSX Composite Index returned only 0.90% per year, placing it in roughly the 10th percentile of something called the "Mercer Pooled – Canadian Equities (PFS) universe.
The S&P/TSX performance figure for the five years ending March 16, 2016 is wrong. The actual figure is 2.95% per year (hardly stellar) but it means every other number - percentiles, medians, anything - is wrong. You can verify that yourself by comparing the TMX's own TRIV values for the beginning and end dates. And the "benchmark" is an unverifiable black hole.
always_learning wrote: 11 Apr 2017 13:36 As a result of the Mercer presentation, the UOIT Pension and Benefits Committee dropped the BlackRock S&P/TSX Composite Index Fund in favour of the CC&L Group Canadian Equity Fund, an active fund that has had above-average return and risk/return numbers over the past 15 years.
Which, based on past performance, has been a great fund. It's not pure Canadian though - recent descriptions show it as about 3% invested in the US - and that would have been a real advantage because the S&P 500 outperformed the S&P/TSX by about 12% per year over the study period. There's 35bp. The fee difference versus passive is another 25bp. CC&L will still look good after those adjustments, so your brother-in-law should be fine. (The usual caveat applies: past performance is no indication of future results.)
DanH wrote: 12 Apr 2017 10:28
twa2w wrote: 11 Apr 2017 15:00So if you took away 80%, of the fee and the cash drag, a lot more mutual fund managers would show as beating the index.
I think this is key.
The retail investor's problem is that they can't get this deal. They can't even get close to this deal. It's fabulous to identify a manager that can outperform a benchmark by 2% per year - and as longinvest points out, quoting Sharpe, it is absolutely impossible for every manager to do so, so you'd better choose very wisely - but if you have to pay 2% per year to get that alpha, not 30bp like a university's pension plan, you're not netting a nickel.
DanH wrote: 12 Apr 2017 10:28a good majority of active managers have outperformed benchmarks over longer periods of time - when comparing both on a gross-of-fee basis (I touch on this in an older article of mine.
What evidence is this based on? Some active managers outperform benchmarks over long periods of time, but a "good majority" or "strong majority" in your article. Where does that come from?
ghariton wrote: 15 Apr 2017 03:32 I deeply distrust the use of proprietary benchmarks, especially if there has been no opportunity to examine how they are constructed and implemented.
Me too.

Let me just add a recent benchmark anecdote. A friend asked me to look at an RRSP statement. The bulk of the account is invested in one fund: Manulife Monthly High Income GIF Select. That fund is about 50% bonds, 25% Canadian equities, 20% US equities, and 5% overseas equities. If you rely on Globefund to measure how good this fund is relative to its benchmark, you'll go badly wrong because the benchmark used is something called the Globe Cdn Neutral Balanced Peer Index. Sure, this fund "beat its benchmark" by 163bp per year over the last four years. Too bad the benchmark is a joke.
Nothing can protect people who want to buy the Brooklyn Bridge.
OhGreatGuru
Veteran Contributor
Veteran Contributor
Posts: 1361
Joined: 27 Mar 2010 16:01

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by OhGreatGuru »

Part of the answer is that they are cherry-picking their 5-year data period in order to show only a 0.90% return. The TSX fell to ~12,000 at the beginning of 2016, from a height of nearly 14,000 early in 2011. It is currently up to ~15,500. The current 5-yr. average return for the TSX is 7.85%. 10-yr average is 4.7%, 15-r. average is 7.43%, 20-yr average is 7.49%
User avatar
always_learning
Contributor
Contributor
Posts: 530
Joined: 01 Mar 2005 21:44
Location: Halifax

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by always_learning »

I'd like to thank everyone who has taken the time to respond to my questions. I've learned a lot, and I've passed along the most pertinent information to my brother-in-law.

Thanks especially for educating me about the basic distinction between pooled funds and retail funds.
Norbert Schlenker wrote: 15 Apr 2017 14:02
always_learning wrote: 11 Apr 2017 13:36 In 2016, Mercer delivered a PowerPoint presentation to the University of Ontario Institute of Technology Pension and Benefits Committee which stated that, over the five years prior to March 16, 2016, the S&P/TSX Composite Index returned only 0.90% per year, placing it in roughly the 10th percentile of something called the "Mercer Pooled – Canadian Equities (PFS) universe.
The S&P/TSX performance figure for the five years ending March 16, 2016 is wrong. The actual figure is 2.95% per year (hardly stellar) but it means every other number - percentiles, medians, anything - is wrong. You can verify that yourself by comparing the TMX's own TRIV values for the beginning and end dates. And the "benchmark" is an unverifiable black hole.
I made a mistake here because I misread the tiny print in a graph in the PowerPoint. Mercer never claimed that the S&P/TSX Composite Index returned 0.90% annually over that time period. Rather, Mercer claimed that, over the five years prior to March 31, 2016, the S&P/TSX Composite Index returned 2.10% per year. I checked that using Norbert's link, and I believe it's accurate.

Norbert, I apologize for wasting your time.

Mercer definitely claimed that, over that time period, the index fell in the 9th or 10th percentile of the Mercer Pooled - Canadian Equities (PFS) Universe.

My brother-in-law now has to make the interesting choice between
1) constructing his own retirement portfolio using this CC&L fund for his Canadian exposure and BlackRock Index funds for his C bonds, US and int'l vs
2) simply picking a BlackRock LifePath Index Segregated Fund (a target date fund) that matches his risk level.

Personally, I'm quite impressed by the BlackRock LifePath Index Segregated Funds.

a_l
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: Mercer is using a proprietary fund universe to argue that Canadian active equity funds have trounced the index

Post by DanH »

ghariton wrote: 15 Apr 2017 03:32
Peculiar_Investor wrote: 11 Apr 2017 14:40 I don't know about the Mercer universe, but Morneau Shepell (yes that Morneau) is another major player in this pension advisor/consulting space. If you want to look at a current report, read Performance universe of pension managers' pooled funds as at December 31, 2016.
Thank you for the link.

That appears to be a brochure with information extracted from the Morneau Shepell report. Presumably the full report is for sale or for subscribers only.

Unfortunately the brochure does not describe the benchmarks used, other than the equity/fixed income mix. I was wondering whether they are mutual funds or ETFs or the indexes themselves. The expenses would be different in each case.
I saw what looked like the full report on that page. But for a similar report with clear benchmarks have a look at the RBC Pooled Fund Survey from Q4-2016. You might have to register (free) to access it.
ghariton wrote: 15 Apr 2017 03:32As well, thanks to DanH for linking to previous articles by him. If the difference in expenses between active and passive funds for very large portfolios is only 0.3 % per year, I fail to see how the results quoted by always_learning obtain. I suspect that the index used in the presentation cited by always_learning may lead to an inflated expense ratio for passive funds.
I can only speak to our experience. The 0.3% per year cost difference is the pure product cost difference (using ETFs as a benchmark). But it doesn't include our fees - just for the product since we always have the option of using ETFs. I can't speak to what different plan sponsors can negotiate in terms of costs, though I'd guess sponsors lack the sophistication to know what they should be paying and how to negotiate these fees. But I know that insurance companies dominate the group pension market in Canada and that may limit the amount of fee negotiation (due to prevalence of seg funds in group plans). And the fastest growing investment option is target date funds which looks to me like a CYA option rather than providing the best investment options.
Norbert Schlenker wrote: 15 Apr 2017 14:02
DanH wrote: 12 Apr 2017 10:28a good majority of active managers have outperformed benchmarks over longer periods of time - when comparing both on a gross-of-fee basis (I touch on this in an older article of mine.
What evidence is this based on? Some active managers outperform benchmarks over long periods of time, but a "good majority" or "strong majority" in your article. Where does that come from?
That data came from eVestment Alliance which is a global institutional database of managers that we use. The nice thing about that database vs. others is that it's not product focused but manager focused. And it's global in scope. Some databases will exclude some managers because they don't offer a pooled fund or mutual fund. This one covers all structures - including strategies of ETF providers like iShares and Wisdom Tree - so it's the most comprehensive single database for global managers that I've seen. It's still going to suffer from some data biases.

That article was a few years ago so if you'll trust my memory (I won't be offended if you don't...I'm getting older ;) ) I recall that ~2/3rds of managers outpaced theoretical index returns for various broad categories - i.e. Canadian Stocks, Global Stocks. If your interested I can try to find more details for you.
Norbert Schlenker wrote: 15 Apr 2017 14:02 Let me just add a recent benchmark anecdote. A friend asked me to look at an RRSP statement. The bulk of the account is invested in one fund: Manulife Monthly High Income GIF Select. That fund is about 50% bonds, 25% Canadian equities, 20% US equities, and 5% overseas equities. If you rely on Globefund to measure how good this fund is relative to its benchmark, you'll go badly wrong because the benchmark used is something called the Globe Cdn Neutral Balanced Peer Index. Sure, this fund "beat its benchmark" by 163bp per year over the last four years. Too bad the benchmark is a joke.
Those Globe peer indexes are really just composites (probably simple averages) of fund returns in the respective fund category. Benchmarking is a big problem and it's easy to make a fund look better than it is by using a weak or inappropriate benchmark. For what it's worth, we starting using a broad based ETF benchmark for some of our internal analysis and investment proposals. I spent time to build a time series of total returns data for going back to 1999/2000 (somewhat biased but it's as far back as I could go). But we'll be expanding this 'conversion' from theoretical no-fee benchmarks to ETF (or investable) benchmarks across all of our materials, reports and illustrations.
Post Reply