Last updated: Nov-12-2018

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, December 01, 2015

What tales the numbers tell sometimes. Fundata performance statistics for most time frames through October 2015, from one month to ten years, show that U.S. equity funds ranked near the top among all 52 fund categories. Index funds, like the CIBC NASDAQ Index Fund and the Scotia NASDAQ Index Fund, both with the Fundata FundGrade® A Rating, reaped the benefits with top-performance in the sector. While that’s partly a currency story for Canadians, the numbers also seem to be a testament to the strength and resiliency of our southern neighbor’s business sector.

Interestingly from a retail investor’s perspective, two of the three top-performing U.S. equity funds (of which there are now almost 200) over most of those time frames were the two CIBC and Scotia index funds. That begs the perennial question: Is active management truly better than passive? The two funds delivered 10-year average annual compound yields that handily beat the 6.5% average of the U.S. Equity Fund category: CIBC NASDAQ Index Fund returning 12.2% and Scotia NASDAQ Index Fund at 11.8% as of Oct. 31.

Technology rules!

Certainly one of the factors in this index fund outperformance is the underlying NASDAQ 100 itself, dominated by big tech household names including Apple Inc. (NASDAQ: AAPL) at 12.2% of the CIBC fund’s total assets, Microsoft Corp. (NASDAQ: MSFT) at 7.6%, Inc. (NASDAQ: AMZN) at 5.3%, Alphabet Inc. (NASDAQ: GOOG), the parent of Google, at 8.2% (between two share classes) and Facebook Inc. (NASDAQ: FB) at 4.1%. Technology comprises 53% of total fund assets but Amazon and Comcast Corp. (NASDAQ: CMCSA), for example, are categorized as consumer services, and this sector represents another 21% of assets. In large part, then, those fund performance figures reflect the growing importance of technology in all aspects of our lives, in the U.S. as elsewhere.


Patrick Thillou, Montreal-based vice president of structured investments for CIBC Asset Management Inc., and portfolio manager of the CIBC NASDAQ Index Fund, acknowledges that currency has played a big role in the fund’s returns lately, and that the U.S. tech sector has done particularly well. “NASDAQ has returned around 31% to Canadian investors in the past year, but the one-year return in the U.S. was 13%, so currency has been an important element, but it’s not the only one. NASDAQ has also outperformed the S&P index. S&P’s one-year return was 21% or 22% [in Canadian dollars], so currency played an even bigger role there.”

Another factor behind those superior index fund returns would be low management expense ratios (MERs). CIBC’s is 1.26%, while the U.S. equity fund average is 1.99%. “That’s a lot when you’re looking at passive versus active management,” says Thillou. He hastens to add, however, that active management is still valuable, especially for diversification with low correlation to the index. “The right manager can make a big difference,” he says.

Not all index funds are alike

By the same token, though, management is important even with index funds, because not all such funds are alike. According to their stated management objectives, the CIBC fund “is managed to obtain a return that approximates the performance of the NASDAQ 100,” whereas Scotia “invests primarily in derivatives that are linked to the performance of the NASDAQ 100.” The difference may seem academic, but the CIBC fund outperformed Scotia’s by varying fractions of a percentage point over all time frames except the month of October.

“We don’t use futures as a core element,” says Thillou. “Certainly if you’re a small investor it doesn’t make sense to buy 100 different stocks -- you would buy derivatives and ETFs [exchange-traded funds] instead. But it’s different when you get bigger. We prefer to buy the stocks themselves because it gives us better control, with less tracking error. We believe that’s the right approach.”

As for what the future holds, Thillou says the broad U.S. markets have done well over the last couple of years, powered by strong growth, but prices have gotten high. “U.S. equities are relatively more expensive, but technology is still less expensive than other sectors,” he says. “It’s probably one of the best sectors, so we’re looking for more good times. Yes, the U.S. is more expensive, but the market’s good and the growth is there.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2015 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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