RBC is number one

Author Gordon Pape discusses the results of a five-year experiment to examine the offerings of the Big Five banks.

Five years ago, we began a unique experiment. We matched the no-load fund offerings of the Big Five banks head-to-head. We set up two portfolios for each bank, one with an emphasis on safety and one with a growth orientation. Each had an opening value of $10,000. We used exactly the same asset mix in each case, varying it over the years.

The purpose was to determine if there was any significant difference in the returns investors received over time. It’s an important question because, among them, the Big Five banks have almost $124 billion of our savings under management in their mutual funds. That’s almost a third of all the assets held by the member companies of the Investment Funds Institute of Canada.  Here are the results.

It’s clear that people are attracted to the convenience of investing where they bank. But it’s not always a good idea. Many would be much better off taking their investment business across the street, especially if they are saving for the long term in an RRSP.

Our five-yearompetition shows that the best bank fund group, by a considerable margin, is the RBC Funds from Royal Bank. Both the RBC Safety Portfolio and the RBC Growth Portfolio came out on top over the five-year period.

The TD Funds came in second in both categories, with the TD Safety Portfolio only a fraction behind the RBC entry. The Bank of Montreal’s BMO Funds were third, while CIBC and Scotiabank trailed the field.

As you might expect, the overall returns for the portfolios were not impressive. During most of this period, stock markets were in decline while low interest rates depressed returns on income funds. The RBC Safety Portfolio ended the five years with an overall gain of 19.11 per cent, while their Growth Portfolio posted a 14.11 per cent advance.

But at least those numbers were in positive territory. Three of the Growth Portfolios actually finished the five years in the red; those of BMO, CIBC, and Scotiabank. That’s very frustrating for investors, but it’s not a big surprise when you consider that several major indexes also were down over the period in Canadian dollar terms, including the S&P 500, the Nasdaq Composite, and the MSCI World Index. When you consider it in that context, the achievement of the RBC Growth Portfolio looks even more impressive.

The driving engine of the RBC Portfolios in the past two years has been the O’Shaughnessy funds, which have produced some outstanding returns. For example, in the six months to June 30, the O’Shaughnessy U.S. Growth Fund posted an advance of 18.5 per cent. The companion O’Shaughnessy U.S. Value Fund picked up 7 per cent while the O’Shaughnessy Canadian Equity Fund added 6.1 per cent. During the same period, Royal also saw good results from the RBC Canadian Growth Fund (+8 per cent), the RBC Dividend Fund (+7.6 per cent), and the RBC Monthly Income Fund (+7.2 per cent).

TD came up with some credible performers, with TD Dividend Income (+8.6 per cent), TD Monthly Income (also +8.6 per cent), and TD Dividend Growth (+7.9 per cent). But its U.S. equity funds all lost ground, and that made a huge difference to the overall result.

It was the same story with the other bank groups. No one had a U.S. entry that came anywhere close to O’Shaughnessy U.S. Growth.

We believe that five years of tracking these portfolios has clearly established the bank fund hierarchy for now. The bottom line for investors in no-load bank funds is that there really is a difference between the institutions, and it can add up to a lot of money over time.

Our next study will be to match up some of the top load fund companies with the RBC Funds, using similar criteria. That should go a long way towards settling the long-running load versus no-load fund debate.