# Managed Funds (at a discount) vs. Passive Funds



## johnnoandy (Sep 4, 2014)

Hi folks, I have a dilemma. I know there's no right answer for this, so just looking for opinions...

I work at a financial institution that offers significant discounts on mutual fund management fees for it's employees. They offer hundreds of funds, and the most I pay is around 1% (vs. 2.5% or more clients would pay). Because of this, I have the bulk of my retirement assets in these managed funds. And they're all ranked 4 or 5 star funds by Morningstar. 

The result of this is that I have about 95% of my investment assets in these managed mutual funds - despite the fact I'm a bargain hunter and promote passive investing (Index/ETFs) to family and friends. I figure I'm getting these funds at such a great discount, I should take advantage of this. It's a well diversified portfolio and the returns haven't been great, but an acceptable 8% over almost 10 years. 

My question: If it where you, would you take the same approach? Favouring discounted managed funds at a cost of 1% vs. passive funds at a cost of 0.5%. I suspect the right answer is both, which I'll likely end of doing... but can't decide if I should favour one over the other? The cost savings of 0.5% doesn't seem massive, but I'll definitely take it. Plus, I don't love the idea (as much as I think highly of the company) of a few guys (portfolio mangers) controlling my destiny. 

So...*What would you do? *If the answer is both, generally speaking, where would you favour managed vs. passive.


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## johnnoandy (Sep 4, 2014)

Does anyone have an opinion on this? Would love to hear it!


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## andrewf (Mar 1, 2010)

Is there anything preventing you from investing in passive ETFs with a MER closer to 0.1%?


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## GoldStone (Mar 6, 2011)

4 or 5 stars on Morningstar is meaningless. They admitted themselves that their stars have no predictive power. You can't buy past returns.


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## Spudd (Oct 11, 2011)

Have you benchmarked your returns vs what you would have gotten with passive indexes over the same time period?


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## cainvest (May 1, 2013)

Spudd said:


> Have you benchmarked your returns vs what you would have gotten with passive indexes over the same time period?


^^ This ... do a comparison and see what the return difference is.

That said, a typical retirement portfolio returning avg of 8%/yr over 10 years is a good return IMO. Many go the mutual fund route and retire just fine but, of course, you might be able to make more if you lower your fees.


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## My Own Advisor (Sep 24, 2012)

andrewf said:


> Is there anything preventing you from investing in passive ETFs with a MER closer to 0.1%?


+1

Personally, I invest via explore and core.

The active management I do is via owning 30+ dividend paying stocks. There are no money management fees except my transaction costs to buy and hold. These costs amount to $20 per month tops.

The passive investing I do borders on sloth. I buy and hold only a couple of ETFs and reinvest all distributions paid to buy more shares every month and quarter. I add new money every few months when I have it/when I can save it. The transaction costs amount to <$50 per year and the <0.20% MER.

So, would I take the same approach? 

No. Knowing what I do now about low-cost ETFs and passive investing, this is generally an excellent way to invest and will only do more of it going-forward.


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## johnnoandy (Sep 4, 2014)

andrewf said:


> Is there anything preventing you from investing in passive ETFs with a MER closer to 0.1%?


Nope. So, change the 0.1% from the 0.5% above, I'm still left with the same dilemma (in my own head at least) whether it's worth paying for the managed funds at a discount. Either way I'm paying more for them.


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## johnnoandy (Sep 4, 2014)

GoldStone said:


> 4 or 5 stars on Morningstar is meaningless. They admitted themselves that their stars have no predictive power. You can't buy past returns.


Fair enough, but not sure what else there is to go on when it comes to managed funds.


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## johnnoandy (Sep 4, 2014)

No... but, not sure I need to check the specific passive funds, isn't it just comparing to the benchmark (index) listed for that fund?


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## GoldStone (Mar 6, 2011)

johnnoandy said:


> Fair enough, but not sure what else there is to go on when it comes to managed funds.


1. Low fees.
2. Low annual turnaround.
3. High active share. Low active share means that they are hugging the index. You don't want to pay for that.

http://www.investopedia.com/articles/mutualfund/07/active-share.asp


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## johnnoandy (Sep 4, 2014)

Thanks all for the feedback. I guess I'm looking for more general responses though. I will certainly looks at specific ETFs, when I make up my mind on the direction I want to go... and to the above point, not sure I'm too concerned with historical returns, to make this simple, lets say the historical returns are comparable net of fees, so now we're looking forward. I'm leaning toward putting 80% of my equity investments in passive and 20% in managed. This is based on the following article - where the state managed funds are beneficial where the specific markets are inefficient e.g., emerging markets, small cap. Below is one of the articles I've read on the topic, as well as an excerpt (keeping in mind some of these guys probably have their own agenda):

_Frank Holmes : Use an Active Manager for Specialized Equity Markets
I believe a portion of an investor's diversified portfolio should hold actively managed funds, especially for specialized equity markets that require specialized knowledge and expertise, as the pricing tends to be inefficient. These areas include emerging markets, small-cap stocks and companies involved in resources and metals mining. The key is in selecting an active manager who has extensive experience investing in these markets, as they understand the seasonal and historical patterns that help them navigate these complex areas_
http://online.wsj.com/news/articles/SB10001424127887324050304578408902783879748


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## Synergy (Mar 18, 2013)

My Own Advisor said:


> Personally, I invest via explore and core.


Off topic, but I'm just curious to know how much of your portfolio do you allocate to the "core" versus the "explore". 50/50, 70/30, etc.

I'm hoping to eventually use my RRSP as a core ETF portfolio and my TFSA and Non-Reg accounts as my explore - individual stocks.


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## Soils4Peace (Mar 14, 2010)

With average luck, low fees, low turnover will win. However, I do/would pay extra for active or passive funds that tilt in a direction I want, e.g.:
- small
- value 
- fundamental weighting e.g. FTSE-RAFI
- alternative asset classes
- a lower weighting in energy and materials, because my career and company shares already have a lot of exposure to those sectors

I would not pay extra for expertise in a particular sector (been there done that: they did not know their sector well enough; 5 star became 1 star).


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## My Own Advisor (Sep 24, 2012)

Synergy said:


> Off topic, but I'm just curious to know how much of your portfolio do you allocate to the "core" versus the "explore". 50/50, 70/30, etc.
> 
> I'm hoping to eventually use my RRSP as a core ETF portfolio and my TFSA and Non-Reg accounts as my explore - individual stocks.


I'm not 'quite there yet' but I want "core" to be close to 50% (via ETFs). They do and will even more so going-forward dominate the RRSP holdings.

I use my TFSA and non-reg. accounts for "explore" but this a bit of a misnomer I guess because the stocks I own have paid dividends for decades and generations. 

All that to say, I'm striving for a 50/50 core and explore split; 100% equities.


For the OP, some broad market ETFs rock. With all the data available now with indexing, it's hard for me to understand why you'd want to pay more than 0.2% fees for any actively managed products. Yes, stocks are "actively managed" per se but a handful of stock purchases throughout the year at $10 each for a $50,000 portfolio (example) is cheap money management.

If you're leaning on putting 80% of your equity into passive products and 20% into managed, as long as those managed fees are low, that's pretty good then.


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## Synergy (Mar 18, 2013)

My Own Advisor said:


> All that to say, I'm striving for a 50/50 core and explore split; 100% equities.


Thanks for the info. I'm looking at breaking up my portfolio 80/20 (equities / FI) and the 80% will be core / explore (I'm striving for a 50/50 split here). That way over the long term, I'll be able to judge for myself which portion of my equities fared the best (core vs explore).


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## johnnoandy (Sep 4, 2014)

Appreciate the food for thought from all of you. Here's what I'm now thinking.

I'm going to leave 20% in managed funds - strong performing target date managed portfolios at 0.85% in fees. I figure that way I'm paying for the stock picking, as well as the asset allocation expertise. 

The remaining 80% will be put into ETF's. My overall portfolio asset mix (managed and passive) will be as follows:
*10% Canadian Equity*
Vanguard FTSE Canada All Cap Index ETF (VCN) - 0.05% IMF
*20% US Equity*
Vanguard U.S. Total Market Index ETF (VUN) - 0.15% IMF
*50% International Equity*
*40%* iShares Core MSCI EAFE IMI Index ETF (XEF) - 0.2% IMF
*10%* iShares Core MSCI Emerg Mkts IMI Index ETF (XEC) - 0.25% IMF
*20% Fixed Income*
*15%* Vanguard Canadian Aggregate Bond Index ETF (VAB) - 0.12% IMF
*5%* iShares Canadian Real Return Bond Index ETF (XRB) - 0.35% IMF

Other points:

I have long time horizon - expect to retire around 2040
This will all be going into registered (RRSP/TFSA) investments

Opinions?

Questions/concerns:
I have much heavier allocation to international equity than is generally recommended. I don't suffer from home bias, and feel this leads to a much more well diversified portfolio. To me, the only significant downside to this is increased currency exposure. 

Am I missing anything? 
Also, I've also been heavily allocated to international equity, but always in the form of a managed mutual fund. Are there any additional concerns I need to take into accounts with ETF's vs mutual funds?
Is 10% in Emerging Markets too much?

Last question (thanks for hanging in there)... I would like to make bi-weekly contributions. I understand this can be costly with ETF's (though haven't shopped around brokerage firms yet, currently with TD Waterhouse) as you're paying every time. It wouldn't be a massive sum of money ($200), as I do the bulk of my contributions as a lump sum at the end of the year. Generally speaking, would it be more cost efficient to make these contributions to a mutual fund (e.g., TD e-Series) vs. buying ETFs every two weeks?


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## andrewf (Mar 1, 2010)

That's a decent approach. I would say your US exposure is low compared to EAFE--is that some positioning based on relative valuation?


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## GoldStone (Mar 6, 2011)

johnnoandy said:


> I would like to make bi-weekly contributions. I understand this can be costly with ETF's (though haven't shopped around brokerage firms yet, currently with TD Waterhouse) as you're paying every time. It wouldn't be a massive sum of money ($200), as I do the bulk of my contributions as a lump sum at the end of the year. Generally speaking, would it be more cost efficient to make these contributions to a mutual fund (e.g., TD e-Series) vs. buying ETFs every two weeks?


Of course!

Common rule of thumb: Keep your transaction costs under 1%. That means buy in $1000 increments if you pay $10 per transaction.

Personally I try to do better than that. My self-imposed minimum is $3000 per ETF transaction. $10 / $3000 = 0.33% cost.


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## johnnoandy (Sep 4, 2014)

andrewf said:


> That's a decent approach. I would say your US exposure is low compared to EAFE--is that some positioning based on relative valuation?


Good point. Might be better to move it in close to 30% each. I do prefer developed global markets, mostly due to my instinct that they're more diverse because they're a bunch of markets spread across the globe. Though the US market is comparable in size, in the end, it's one market and politics or other factors specific to the US could potentially be detrimental across several sectors in that index. Though, it's a global world so I've probably taken it a bit too far. How does a 25:35 (US:EAFE) split sound?


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## johnnoandy (Sep 4, 2014)

GoldStone said:


> Of course!
> 
> Common rule of thumb: Keep your transaction costs under 1%. That means buy in $1000 increments if you pay $10 per transaction.
> 
> Personally I try to do better than that. My self-imposed minimum is $3000 per ETF transaction. $10 / $3000 = 0.33% cost.


That's what I figured... I just hate the fact I now need to own more funds... trying to kill off as many as I can. My portfolio has become bloated over the years. I guess the other approach is to not to make the contributions from every pay cheque, just park that money in cash and make them as lump sum contributions... just need to be disciplined about doing that. Trying to set myself up so "couch potato" style in that I only have to review and tweak my portfolio once or twice a year.


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## Spudd (Oct 11, 2011)

Another option for your US/international would be to buy VXC - it holds all world except Canada in proportion to their global market cap.


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## johnnoandy (Sep 4, 2014)

Spudd said:


> Another option for your US/international would be to buy VXC - it holds all world except Canada in proportion to their global market cap.


Good suggestion: https://www.vanguardcanada.ca/individual/etfs-detail-characteristics.htm?portId=9548#couExpH
This could replace the emerging markets component of my portfolio, which would mean 70% of my assets in the one fund. Looking at the overview it appears to specify there's limited small cap exposure with this fund. I can't find comparable data for the XEF. http://www.blackrock.com/ca/individ...ex-etf?locale=en_CA&siteEntryPassthrough=true


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