It is pretty tough to be a Canadian passive investor because you don’t have many options available to you and the active mutual fund industry is massive. The amount of advertising that goes around is amazing and sometimes you don’t realize it until you look into it. I recently took on a new job at a company that has an RRSP matching program with Manulife. You open up the book on investment options and you see all these amazing returns. The MER (Management Expense Ratio) is pushing 2%, but with those returns you would think it was worth it.

It’s all objective data, but you can choose how to present and really make any fund look profitable. I was in a discussion with someone about this very thing and he was comparing his fund against the S&P/TSX index. The fund had a 1.24% MER and here is the graph he shared with me.

I hid the fund name, just to be safe against any sort of “legal” type of attack. Looking at that graph you think that this fund is amazing. It did a really good job and definitely outperformed the TSX Composite Index. In fact, the last few years it seems like it greatly outperformed the market and this must be a good fund.

This is the type of advertising I’m talking about. It’s not a true representation of facts. If there was an industry standard for presenting this information you would be able to see the differences.

The big thing for me is what they’re actually trying to present. From what I can tell, this isn’t real returns, but if you invested at the start of the graph, this is where you’d end up compared to the TSX. In fact, the last three years the TSX outperfomed this fund for the most part, yet you don’t see it on the graph. You can click here to see the last three years.

Also something that isn’t reflected in the graph is the MER of the fund. The fund would have to beat the S&P/TSX by more than 1.24% each year to actually make a gain.

Despite the fact that the last three years (which is as far back as I can go with Google Finance) shows the TSX beating it out, there is something that many people don’t think about and typically the people against passive investing (and love mutual funds) miss; is it right to compare the S&P/TSX Composite Index with this fund?

The answer to this question is no. This fund actually holds onto a higher number of financials and lower numbers of energy, utilities, materials when compared to the TSX. It’s just not a real comparison.

What I’m trying to say is that you need to watch out for the mutual fund advertising trying to show you how much money you can make if you just pay an extra fees for their superior product. The likelihood of it being superior is just about nil. You’ll find that if you investigate into what an active managed fund is trying to tell you, you’ll see that the picture isn’t as rosy as it seems.