BPM October 2010.indd - Benefits and Pensions Monitor

Benefits and Pensions Monitor – October 2010
2010 Annual Report & Directory
Passive management refers to a simple buy
and hold management strategy. In passive
management, the manager creates and
maintains a portfolio that closely tracks a
market benchmark. For our purposes that portfolio
will be measured by a leading market index, the API
BPI1 which is used for balanced funds along with a
separate comparison using CPI, plus four per cent, a
common benchmark for total
fund values of a pension plan.
In contrast, active investment
involves a selection of
securities in an asset class
and more frequent buying and
selling of securities. An active
manager seeks to build a portfolio
with selective securities
that are undervalued compared
pooled funds beating this benchmark.
However, when fees are added - 50 bps for example
- we fi nd some changes taking place. The most
noticeable difference is found in bonds as over a
10-year period the proportion of funds above the index
dropped by 45 per cent indicating that many active
bond managers do not provide better than 50bps.
Over a 10-year period, only 44 per cent of man-
Active Versus Passive
to others in the same class and, thus, earn an above
average return.
Market Timing Strategy
Second, by employing a market timing strategy,
the manager hopes to buy securities
when the market is down and
sell securities when the
market is up, as opposed to
a buy and hold strategy for
passive management. The
argument for active management
is that the fi nancial
market is not effi cient in the
sense that securities are not
always fairly valued.
Chart 1.1 illustrates
the proportion of funds in
a given asset class that
have performed better
than an index
over one-, fi ve-,
and 10-year compoundedperiods
along with the
quarter ending June 30,
2010. Over 10 years, and
ignoring management fees, most active
managers have benefi ted the investor in all
asset classes.
Over a 10-year period just over a quarter of
balanced pooled funds beat this benchmark. There
are extreme lows and highs over the fi ve- and oneoneyear periods respectively and analysis over a 15-year
compounded period had 97 per cent of balanced
Chart 1.1 Proportion of Funds above Index 1
Balanced Bonds Canadian International US
10 Years 87% 70% 91% 57% 65%
5 years 56% 78% 40% 50% 44%
1 Year 61% 81% 45% 58% 41%
Qtr 38% 40% 30% 57% 37%
Source: API Asset Performance Inc. 1 Compound Period Ending June 30, 2010
agers beat the benchmarks of the index plus 25 bps.
From this we can also infer that half of all bond
managers reviewed earn between zero and 50bps
above the index over a 10-year period.
Signifi cant Decrease
Based on the ability of a fund
to add value to the relative
asset class market index,
the analysis suggests
that it pays to pursue
an active investment
strategy over some
time periods and a passive
investment strategy in others.
When fees are introduced, there is a signifi
cant decrease in the manager’s ability to
better the benchmark.
Each asset class should
be viewed as having a window
of opportunity and
the plan sponsor should be
cognizant of their investment
manager and how
they perform throughout
the investment cycle. Over
long periods of time, an
active investor has the ability to
beat an index. However, over shorter
periods this becomes
more diffi cult. ■
Robert Dyck, CAIA, FRM, is a consulconsultant with API Asset Performance Inc.
(rdyck@apiasset.com)
By: Robert Dyck
INSIDE
2010 Annual
Directory Of
Money Managers
Page 42
2010 Statistical
Report Of
Money Managers
Page 52
For complete information
from the 2010 Money
Managers Report, visit
www.bpmmagazine.com
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