There's a longstanding debate among investors about the pros and cons of active investing versus index investing. It's impossible to say that one is better than the other, but as an investor, it's important to understand the differences between these investing styles in order to make the best choice. This short video will discuss these two different approaches. You can use this video and others to help you in coming up with your own asset allocation. It has always been important to be able to measure the performance of our investments. Performance is frequently measured by the annual rate of return of the fund. Although annual returns are very important, most investors eventually realize that these themselves need to be measured against something. Perhaps your long-term goal is to average a 6% annual rate of return. Maybe last year your investments returned an average of 8%. This might seem very satisfactory to you, unless you learn that a similar investment allocation averaged 12%. Then you might wonder why your investments had actually underperformed.
<On the slide:> Slide title: Active or passive? <End slide>
The need to measure financial markets has given rise to many different indices. One of the best known indices in Canada is the S&P/TSX Composite Index – often referred to as the Toronto Stock Exchange Index. The S&P/TSX represents several hundred of the biggest companies in Canada across different sectors including financials, energy, healthcare and consumer staples. Each day the performance of underlying stocks in the index is factored into the performance of the index that day. If the index advances, it means overall the Canadian economy is advancing. If the index declines, it is usually an indicator that the economy may be contracting in the future. In any given day, the index could advance or decline, but over the long term the S&P/TSX is considered to be a very accurate indicator of Canada's economy. When someone decides to invest in a Canadian equity fund, the most important benchmark they may use for measurement might be the S&P/TSX. If a Canadian equity fund outperforms the index, that's typically taken as a sign that the fund manager, through their research and analysis, has managed to outperform the index and the broader Canadian market. In recent years, many investors have turned to 'index funds' as a means of investing. For someone investing in the Canadian equity market, this might mean investing in a Canadian Equity Index fund that mirrors the performance of the S&P/TSX Composite Index. The fund manager will attempt to replicate the performance of the index by investing in all the different stocks which make up the index – in the same weighting as the index. One of the main benefits of this approach is cost. The fund management fees for index funds are typically much lower than active fund managers who pick and choose investments through their own research and analysis. If you're investing in a fund such as a Canadian equity index fund, you can rest assured that if the Canadian
economy is doing well, your fund should also be performing well.
<On the slide:> Slide title: Index or passive fund
- Tracks an index
- Generally lower fees
- US equity index: S&P 500
- Canadian equity index: S&P/TSX
- World index: MSCI World Index <End slide>
The active fund manager's goal is to outperform a market benchmark or index. They will make their investment choices through their research and analysis. Perhaps their research this year on the Canadian market points to strong performance from the energy sector and weaker returns in financial services, so they can make their choices accordingly. If their research proves correct, they should outperform the index. You will usually pay a higher fee for an active fund manager to compensate for this additional research and analysis. This option may be more attractive in a volatile market where certain sectors are outperforming and active managers can target those sectors that may benefit from the unique conditions existing during this period. Different active fund managers may have different 'styles'. A growth manager will usually be looking for opportunities for growth, either in a sector, or in a specific stock. They may be willing to pay more for a stock if they feel that there is potential for growth. A value manager, on the other hand, is usually looking for bargains. They will frequently look at the underlying fundamentals on a company's balance sheet and might purchase a company which they feel is undervalued – even in a sector which may be underperforming, if they feel that stock is a 'bargain' and eventually the value will recover when the market realizes it was undervalued. Growth and value styles can actually complement each other when an investor is attempting to build a diversified portfolio. Many investors will leverage both index and active fund managers as they build their investment portfolio.
Is active better than index investing? It depends. In the retail market, index funds often have much lower fund management fees than actively managed funds. If the active fund manager adds value over time, perhaps paying higher fees is warranted. Although fees are certainly an important consideration when selecting an investment, the fund management fees are typically lower in a group plan than at other financial institutions.
So, what is best for you? It depends largely on your own investing philosophy and tolerance for risk. There may be a place for both index and active fund managers in your portfolio. Sun Life's Asset Allocation Tool on mysunlife.ca can help you determine
your personal risk tolerance.
The quarterly investment reports on each fund, compiled by Morningstar, can explain more about the individual investment funds in your program, their style, whether they are active vs. index, as well as the fund manager's investment goals and objectives. Working with a financial advisor can also help you achieve a cohesive financial strategy.
<On the slide:> Morningstar® available at mysunlife.ca:
- Compare funds
- Get historical rates of return
- Learn about fund objectives <End slide>
Consider these next steps given the information we have covered today.
<On the slide: Slide title: Your action plan:
- Go onto your account and find your fund options and performance.
- Compare fees and long-term performance between Active and Index Funds.
Thank you for your time today.
<On the slide:> The information provided is of a general nature and should not be construed as personal financial or legal advice. Neither Sun Life or its affiliates guarantees the accuracy or completeness of any such information. The information should not be acted on without obtaining counsel from your professional advisors (registered as Financial Security Advisors in Quebec) applicable to your particular set of facts.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life group of companies. <End of slide>
