In Canada, passive investing is growing in popularity, although the market shares of Canadian index funds remain significantly lower than those of American funds. (Archive photo)
Yanick Lepage (View profile)Yanick Lepage
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Seduced by lower management fees, Canadians are increasingly turning to passive investment funds. Amounts invested in this type of investment have almost quadrupled in a decade, according to a new report.
Last year, $310 billion was invested in passively managed funds, which represented 16.4% of the Canadian market, according to the firm PWL Capital. In 2014, their share of the pie was less than 10%.
Passive funds are investment tools, like index funds or exchange-traded funds, that attempt to replicate market returns inexpensively, rather than outperforming them by picking and choosing stock stocks.
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Report author Raymond Kerzérho says he sees a thriving culture of passive management.
PWL Capital, which offers financial management services for wealthy individuals, relies in particular on index funds to grow its clients' assets.
From the year 2000, we started using index exchange-traded funds because it was considered that they provided better added value for clients.
A quote from Raymond Kerzérho, principal researcher at PWL Capital
Numerous studies have shown that only a minority of active investment funds manage to outperform market returns in the long term.
For example, over a 10-year period, nearly 95% of mutual funds comprised of Canadian stocks underperformed the returns of the S&P/TSX, the main Toronto stock market index, according to data of S&P Global.
Investors are thus questioning the merits of higher management fees for active funds.
According to PWL Capital, fees for this type of fund were 1.44% on average in 2023, compared to 0.25% for Canadian passive funds.
There are fewer fees, so I know I can make more money when I make the investments myself, says Adrien Rebselj, a young Torontonian who invests in index funds because he says he doesn't not have time to choose individual titles.
I didn't want to pay a bank for someone to manage my money, explains Nathalie Normand, also a fan of passive investing.
Although it is gaining ground in Canada, passive investing remains significantly more popular south of the border.
According to PWL Capital, 47% of money under management in the United States is invested in passive funds, or approximately $12.5 trillion.
Since 2014, investors have added $5.1 trillion in new money to U.S. passive funds. They withdrew $1.9 trillion from active funds during the same period.
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According to Shady Aboul-Enein, who teaches finance at HEC Montréal, this increased enthusiasm for passive investment in the United States can be explained in particular by the fact that more American investors manage their wealth themselves.
The expert maintains that the simplicity of index funds makes them an attractive investment for self-directed investors, who are fewer in number in Canadian markets.
In Canada, we still rely heavily on the services of a portfolio manager to gain security in [our] investment choices.
A quote from Shady Aboul-Enein, lecturer in the Department of Finance at HEC Montréal
If he considers that this approach is motivated by a certain reluctance, the finance professor still praises the merits of the services offered by professionals.
In my opinion, to succeed in doing a good job in wealth management or in asset management in general, we must devote 100% of our time to it, believes Mr. Aboul-Enein, citing in particular the efforts necessary to make a good selection of securities and to regularly rebalance a portfolio.
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Finance professor Shady Aboul-Enein believes that the services of a portfolio manager can be a wise expense. (File photo)
Mr. Kerzérho believes that limited competition in the Canadian financial sector is slowing the adoption of passive investment in the country.
We know that passively managed funds are funds with a [much lower] profit margin for the financial services sector, estimates the principal researcher at PWL Capital. So, there is an interest in migrating as slowly as possible towards there.
By email, the Canadian Bankers Association indicates that banks offer investors access to the financial tools they need to manage their finances, adding that these tools are affordable and accessible.
The Investment Funds Institute of Canada, for its part, did not respond to Radio-Canada's questions.
Experts fear, however, that the rise in popularity of passive investing could affect the health of financial markets.
Aboul-Enein says passive management does not rely on the fundamental valuation of companies in a portfolio, an approach often described as the cornerstone of healthy stock valuation.
He also mentions liquidity risks associated with the structure of index funds.
If the market falls and several investors decide to sell their investments in index funds en masse, certain individual securities contained in these funds could see their value plunge suddenly, worries the finance professor.
< p class="StyledBodyHtmlParagraph-sc-48221190-4 hnvfyV">When there is overconcentration in certain stocks and then everyone wants to [sell], it can create market movements, then volatility, explains- it.
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Some experts worry that too much popularity of passive investing could destabilize financial markets. (File photo)
Without sounding the alarm, Mr. Aboul-Enein invites financial authorities to carefully monitor the situation in order to detect any risks to the health of the markets.
He believes that in 2007 and 2008, at the start of the financial crisis, the authorities clearly did not ask themselves these questions and that created very big problems.
If we look at the recent history of financial markets, clearly, I think we can never ask ourselves enough questions.
