How investors benefit from active management

Transcription

1 How investors benefit from active management

2 The benefits of active management CI Investments believes that active investment management adds significant value and benefits to investors. Active management is one of two basic approaches to investing. The other alternative is passive management, also known as indexing. Investors pay fees and expenses with both options. Most Canadians invest through actively managed mutual funds using a financial advisor. What is indexing? What is active management? Indexing is an investment strategy which seeks to match the performance of a benchmark index by buying and holding all of the investments, and in the same proportion, as the index, or by investing in a representative sample of the securities in the index. You cannot invest directly in an index. Portfolio managers of index-based investments do not perform analysis of stocks or bonds or market conditions. Investments such as exchange-traded funds (ETFs) provide exposure to the holdings of an index. An ETF with the trading symbol XIU, for example, attempts to match the returns and composition of the S&P/TSX 6 Index, representing 6 of the largest companies in Canada. Active management is a disciplined investment process in which portfolio managers analyze, buy and sell securities such as stocks or bonds based on the investment fund s mandate. The managers seek to invest in quality securities that offer greater investment potential than the overall market. Signature Select Canadian Fund, one of CI Investments oldest and largest Canadian equity mutual funds, is an example of an actively managed fund. What you get with each approach Indexing Active management Opportunity to outperform the index after fees No Index returns - fees = below-index performance Yes Focus on quality No Yes Reduced volatility No Yes Downside protection No Yes Considers valuations when deciding what investments to buy and sell No Yes Risk management strategies to avoid excessive overweight allocations to individual securities or sectors Personalized services of a financial advisor that may be included in the management fee: No Yes investment and retirement goals risk tolerance cash flow needs tax management reviewing your progress and adjusting to changing circumstances. No Yes

3 Signature is one of CI s leading teams of investment managers Signature Global Asset Management actively manages a diverse range of equity, balanced and income funds. Signature s 4 investment professionals are led by Chief Investment Officer Eric Bushell, who is the portfolio manager of Signature Select Canadian Fund. The team includes four global investment strategists (from left): Eric Bushell, Drummond Brodeur, Matthew Strauss and Jean-Philippe Bry. Signature s expertise has been recognized by 17 Lipper Fund Awards since 27 and 15 Morningstar Awards since 21. Why there s a difference in fees for active management and indexing Downside protection Generally speaking, investment management fees for actively managed funds are higher than for index funds. This is to pay for the investment professionals who analyze stocks and bonds and market conditions for the fund. To provide downside protection, reduce volatility and minimize investment risk, active managers can avoid investments or areas of the market that have become overvalued. The mutual funds held by most Canadians also include a service fee paid to dealers for ongoing advice to clients. Although we are in the seventh year of a bull market, many Canadian investors will recall how the bear market of raised their sensitivity to downside protection. Investors who use active management can benefit from downside protection during periods of market weakness. Active managers can take steps to protect the assets of the fund by switching to safer investments such as cash. In contrast, the indexing mandate offers no flexibility and is to be fully invested at all times. S&P/TSX Composite Index versus Canadian equity funds Bear markets Peak Month Trough Month TSX Performance Average Fund* Performance Difference November 198 June % -27.2% +11.6% July 1987 November % -23.% +2.4% December 1989 October % -15.5% +4.6% April 1998 August % -24.3% +3.2% August 2 September % -26.9% +16.3% May 28 February % -42.8% +.6% Average -33.1% -26.6% +6.5% * Source: Globe HySales. Based on the average of 569 funds (558 actively managed mutual funds and 11 index funds); calculations are made using month-end figures. As the table illustrates, the average Canadian equity fund outperformed the S&P/TSX Composite Index in all recent bear markets. The Canadian equity funds data are not just illustrative of top-quartile performers, but are an average of hundreds of funds.

4 In praise of active management If my universe of business possibilities was limited, say, to private companies in Omaha, I would... try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. Warren Buffett Finding opportunities and avoiding pitfalls Active managers can add value by identifying and buying the stocks of out-of-favour companies that have attractive growth prospects. They can also avoid jumping on the bandwagon when a particular hot stock starts to take off, fuelling an irrational buying frenzy. In 2, Nortel Networks was Canada s tech darling, peaking at $124.5 a share. It fell to 39 cents a share in 29 as the company prepared to file for bankruptcy. Investors who loaded up on that stock suffered massive losses when it later crashed. Nortel s rise and fall also illustrates a risk of index-based investing: Nortel at its height represented 45% of the S&P/TSX 6 Index. Investors who had used an ETF based on that index may not have realized until too late that they had massive over-exposure to one stock and to one industry sector. Active managers monitor and manage their security and sector exposures with a view to reduce risk and optimize returns. The advantages of using a financial advisor At CI Investments, we believe investors are most successful when they follow a sound financial plan developed with the assistance of a qualified advisor. Your advisor can help you clarify your financial situation, determine your risk tolerance and goals, reduce your tax burden, review your progress and achieve your goals.

5 Comparing the 15-year performance of two Canadian equity funds to the S&P/TSX 6 Index XIU is the largest ETF in Canada. Its costs do not include investment advice provided by a financial advisor. Signature Select Canadian Fund (Class A) is one of CI s largest and most popular mutual funds. It is actively managed and its costs include the benefits of advice from a financial advisor. XIU ETF passively managed and does not include advice Cumulative outperformance/underperformance vs. the S&P/TSX 6 Index (July 1, 2 June 3, 215) It underperformed the index it emulates by a cumulative 6.5%. It underperformed the index in 34 of the 6 quarters Quarterly Excess Returns % (left scale) Cumulative Excess Returns % (right scale) Standardized performance data (as at June 3, 215) 1 year 3 years 5 years 1 years Since inception (Sept. 28, 1999) XIU ETF.5% 11.6% 7.9% 6.9% 7.% Signature Select Canadian Fund (Class A) actively managed and includes advice Cumulative outperformance/underperformance vs. the S&P/TSX 6 Index (July 1, 2 June 3, 215) It outperformed the index by a cumulative 145.3%. It outperformed the index in 33 of the 6 quarters. Its quarters of outperformance beat the index by an average of 3.2%. In quarters when the index declined, the fund outperformed on average by 2.2% offering significant downside protection Quarterly Excess Returns % (left scale) Cumulative Excess Returns % (right scale) Standardized performance data (as at June 3, 215) 1 year 3 years 5 years 1 years Since inception (May 13, 1998) Signature Select Canadian Fund (Class A) 4.7% 13.2% 9.6% 7.3% 9.7% Source of the data for the charts and tables: Copyright 215 Morningstar. All Rights Reserved.

6 Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. Signature Funds and Signature Global Asset Management are trademarks of CI Investments Inc. Morningstar Awards Morningstar Inc. All Rights Reserved. Lipper Fund Awards are given by Lipper, Inc. to recognize funds that have provided superior consistency and risk-adjusted returns when compared to a group of similar funds. Awards are given to the fund with the highest value within its category for the time periods of three, five and 1 years according to the Lipper Leader ratings for Consistent Return, which reflect funds historic returns, adjusted for volatility, relative to peers. Lipper Leader ratings change monthly. For more information, see lipperweb.com. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analyzing, managing, or trading financial instruments is at the user s own risk. This is not an offer to buy or sell securities. 2 Queen Street East, Twentieth Floor, Toronto, Ontario M5C 3G7 I Head Office / Toronto Calgary Montreal Vancouver Client Services _E (7/15)