Should You Be Investing in Dynamic Funds?
One of the growing trends in investing is to make sure of funds. With the help of funds, it’s possible to build a diverse portfolio that doesn’t rely on individual investments. Fund investing allows you to reach goals by holding a number of investments at once.
Many investors have been shifting to index funds and ETFs, since they are even easier to invest in, at least when it comes to making decisions about which funds to choose. With index funds and ETFs, you don’t try to beat the market; rather, you try to keep pace with the market (you end up a little behind the market, though, once you factor in fees and taxes). As long as the market does well over time, then you come out ahead of your original position.
But what about if you want to attempt to outperform the market? Do you want to try to beat the TSX? In order to do that, you might need to take a more active approach to your investing. This doesn’t mean that you have to become an active trader of individual stocks. There are funds that are actively managed, and that have the potential to perform well over time. Dynamic Funds is a company that offers these types of fund options.
What Offerings are Available with Dynamic Funds?
With Dynamic Funds, you have the opportunity to choose investments based on your investment goals. Each of the funds performs a different purpose. For instance, if you want a fund that is designed to provide you with growth, the Dynamic Power Canadian Growth Class or the Dynamic Power American Growth Fund, could offer you that. There are balanced funds and small cap funds that can also provide you with different levels of growth.
But it’s not just growth available. Dynamic Funds also provides a selection of value funds. You can find value funds from different parts of the world as well, investing in Europe or the Far East. It’s also possible to use the Global Asset Allocation Fund to create geographic diversity in your portfolio. Dynamic Funds also offers equity income funds, blue chip funds, fixed income funds, and specialty funds (such as those based on gold or energy or real estate).
No matter your investing goals and preferences, you can usually find what you are looking for. And many of the funds offered by the company have seen decent growth recently. Of course, past performance does not guarantee future results, but it can give you an idea of the track record that is expected with some of these funds.
Another thing to consider is the fact that these are actively managed funds. This means that your expenses and other fees are likely to be higher. There is the chance that you will see solid performance, but you also have to contend with the likelihood that higher fees reduce your real returns. Of course, if the funds do well enough, that isn’t such a big deal, since the higher returns can offset your fees.
Dynamic Funds is a company that provides you with additional choices, and market-beating potential. But you could also lose out. You need to examine your investment style and your goals to determine whether or not managed funds are really right for you.
Comments
Tom, this sounds like an outright endorsement for Dynamic. If it is, the blog is losing a bit of credibility with me.
Tom, I agree with B Kwan. What’s up?
Boooo! Sounds like paid advertisement.
Sorry if it seems that way. For years I have been a fan of index funds, and that hasn’t changed.
This post is not paid for in anyway and I’ve never had contact with anyone from Dynamic Funds.
It’s also not an endorsement. I only simply meant to cover them as I was looking into alternatives to what I do and noticed that a couple years ago they had gained some attention for beating the market.
>noticed that a couple years ago they had gained some attention for beating the market.
It is pretty much a certainty that some funds will beat the market in some years. I’m sure you know that the track record for active funds is dismal though. And SPIVA clearly shows that:
http://us.spindices.com/resource-center/thought-leadership/spiva/
IG, Have you looked at the funds Tom mentioned?
They have all beaten their indexes handily since inception. The Dynamic Power American has been around for 15 years and has beaten the S&P500 by 4.3%/year compounded after all fees. The Canadian has beaten the TSX by .8%/year for 25 years since inception. Their Power Global has beaten the MSCI World index also by 4.3%/year compounded for 12 years since inception.
These are somewhat aggressive funds, but the fund managers certainly have some skill. They tend to have higher returns in both directions.
The manager of the Power American, Noah Blackstein, has twice won awards for the best U.S. equity fund manager in North America, beating out thousands of fund managers south of the border. Their compensation is unique and quite motivating for them.
These guys are an example of skilled fund managers. I believe it is highly likely they will continue to beat their indexes over time.
Ed
Hi IG,
The SPIVA report is not very informative. It asks whether the average fund manager can beat the index and analyzes that to death, but that is an irrelevant question. Who cares? Nobody should buy an average fund.
The reason most mutual funds underperform is because most are “closet indexers”. They just try to be similar to the index to protect their job. They are not really trying to beat the index. In Canada, at least 70% of fund mangers are closet indexers.
The far more in-depth study is the “Active Share” study by 2 Yale professors. It asks the important question: “Is there ANY category of fund managers where most of them beat the market?” They found that the true stock pickers, fund managers with holdings 80% or more different from the index, most of them beat the index and tended to continue to.
I think this is mostly about getting the “closet indexers” out of the study.
To me, the idea that nobody can beat the index does not meet the logic test. In every field, there are some highly skilled people. The index firms have done a great job marketing it. They even have most people believing the “Efficient Market Theory”, even though it has been proven false (by the behavioural finance profs).
There are skilled fund managers out there that beat their indexes long term that are almost definitely skill. These Dynamic guys are some good examples. I own one of them and have owned it for more than 10 years.
Ed
Hi Ed,
Let me ask you a question. In your practice, how do you get compensated? Do you sell actively managed funds to your clients and get sales commissions and trailer fees? If you do, wouldn’t it create a potential bias towards expensive actively managed funds?
>There are skilled fund managers out there that beat their indexes long term that are almost definitely skill.
Perhaps it’s skill but it’s indistinguishable from luck as this study by Eugene Fama and Kenneth French shows: http://www.marketwatch.com/story/to-beat-index-funds-luck-is-your-only-hope-2009-12-01
Hi IG,
You’re obviously not from Investors Group! To answer your question, no, I would be paid for any investment I recommend. If I believed in index funds or ETFs, I would recommend them and charge my regular fee.
I assure you my belief in All Star Fund Managers is genuine. 100% of my investments are in actively managed mutual funds or hedge funds. I am just not happy lagging an index.
Fama & French are widely discredited. This excellent book by Justin Fox traces the rise and fall of the Efficient Market Theory, which is the basis for their Fama & French: http://www.byjustinfox.com/the-myth-of-the-rational-market.html . The current thinking of financial academics is best explained by Yale Professor Robert Shiller that the efficient market theory “represents one of the most remarkable errors in the history of economic thought.”
Yale professors Cremers & Petajisto were able to successfully identify skill that persisted in a massive study. Here is the study: http://www.edrempel.com/pdfs/Active%20Share%20Study%20-%20How%20Active%20Is%20Your%20Fund%20Manager.pdf . It’s technical, but just read the abstract on page 1. Here is a video interviewing Petajisto about Canadian mutual funds: http://www.iaclarington.com/en/promo/active-insights/how-active-are-canadian-equity-funds.aspx .
Our investment process is entirely based on studying fund managers and identifying the ones with real skill. It takes a lot of research, but I believe they can be identified and that the skilled fund managers do tend to outperform over time. (I wrote a few articles about this on another blog.)
All of my personal investments are with the same active fund managers we recommend for our clients.
Ed
Hi IG,
For some reason, my reply to your comment appears above your comment.
Ed
Hi Ed,
I don’t think so. On Aug. 26 you posted 2 comments.
Any comment on potential conflict of interest that compensation structure creates?
ig
Hi IG,
I already answered that question. Obviously, the writers of the SPIVA report are biased, which explains their inability to identify top fund managers other more in-depth studies find.
The outperformance of the specific funds in this article are significant and long term, and I believe a result of skill. I find many amateur investors have a blanket assumption that mutual funds will always lag indexes over time and they write off a fund with no knowledge of the fund manager.
Don’t you think beating the index by 4.3%/year compounded after all fees for 15 years is significant? If you doubt the figures, look them up on Morningstar. It has been the same fund manager the entire time. You would really dismiss this as luck?
Ed
Seriously, Ed? I asked about your – Ed Rempel’s – potential bias towards actively managed funds due to your compensation structure. Why do you avoid answering this direct question?
IG,
Look, Tom wrote an article and I have some personal knowledge about the funds. I gave an honest post with my opinion and the actual Morningstar stats. I noticed that none of the other posts showed any knowledge of the funds, so I tried to add some facts.
Tom’s article did sound a bit like an endorsement because he quotes the name Dynamic, which is a fund company with many funds of varying qualities. However his point about 2 specific funds outperforming is very valid.
I think this is a message missing from the blog world. Many financial bloggers seem to be heavily biased against mutual funds, even though they appear to have little knowledge about them. At the same time, they do not seem to question obvious issues with index funds (such as the market being purely efficient is illogical and rejected by nearly all finance academics).
I commented because I thought this is a valid issue not being discussed anywhere and I have knowledge to add.
Is your position that anyone licensed for investments cannot express opinions here?
I should add that I don’t own or recommend either of the funds Tom mentioned, but I do own and recommend a different fund managed by one of these fund managers. I know him to be very intelligent, knowledgeable and motivated, as well as somewhat of a Rodney Dangerfield attitude.
To answer your question, yes, I said a few posts ago that I would be paid by whatever investment I recommend. Mutual funds would pay me a commission & trailer fee, but I would make a similar amount for index funds on a fee-based basis. Our practice is primarily focused on comprehensive financial planning, including retirement, tax, debt, cash flow & estate planning. Our clients find it worthwhile working with us for purely planning reasons.
Here is a question for you. Why did you not question the obvious bias of SPIVA, which publishes research to prove nobody can beat it’s own indexes?
If you think broadly about the report, you will realize that they analyze to death questions that may not identify superior investments, while being obtuse and ignoring questions that would identify superior fund managers (such as: “Is there ANY type of fund manager where most beat the index?)
Ed
Ed,
Thank you for disclosing that mutual funds pay you sales commissions and trailer fees.
>Is your position that anyone licensed for investments cannot express opinions here?
Not at all. I do think though that it’s only fair to disclose that you receive compensation from mutual funds companies whose products you sell.
>Many financial bloggers seem to be heavily biased against mutual funds
I don’t see that. Tom, for example, wrote an excellent piece on TD e-Series Funds recently:
https://maplemoney.com/td-e-series-funds/
What many financial bloggers are against is expensive actively managed funds. And Warren Buffett agrees: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”
>I know him to be very intelligent, knowledgeable and motivated, as well as somewhat of a Rodney Dangerfield attitude.
Great! A comedian as fund manager! Sign me up! LOL
>Why did you not question the obvious bias of SPIVA, which publishes research to prove nobody can beat it’s own indexes?
Because Standard & Poor’s methodology and numbers are open for peer review. If they were fudging the numbers they would be called on it a long time ago.
Also, S&P’s Indices Versus Active scorecards don’t prove that nobody can beat their indexes. What they prove is that few -less than what would be randomly expected – active funds manage to do so over meaningful periods of time. Trying to identify in advance the funds that will consistently outperform is practically impossible. And considering that one would most likely need several funds to construct a portfolio, the task of putting together an outperforming one becomes pretty much insurmountable. For more on this, see Rick Ferri’s white paper:
http://www.rickferri.com/blog/investments/low-odds-of-high-returns-with-active-funds/
I am pretty sure that you know all of this, Ed, but choose to ignore the evidence in favor of passive low-cost index funds. And I think I can even guess the reasons why. 😎
Cheers,
ig
a happy DIY investor
I loved the great ideas I found in the “getting organized” article. Prepossessing things is an all time favorite pastime of mine but I can always use more suggestion!
Thanks to Home Made Simple!!!
Just looked those funds up on Morningstar:
Dynamic Power Canadian Growth Class
MER: 2.44%
3-year Alpha: -7.35
5-year Alpha: -5.50
10-year Alpha: -0.81
3 and 5-year Morningstar Rating: 1 star
So it never actually beat its benchmark index on a risk-adjusted basis.
Dynamic Power American Growth
MER: 1.69%
3-year Alpha: -0.44
5-year Alpha: -2.30
10-year Alpha: 4.32
15-year Alpha: 5.25
3 and 5-year Morningstar Rating: 4 and 2 stars respectively
This fund did perform well in the past (positive Alphas) but its performance on a risk-adjusted basis in the past 3 and 5 years was lackluster. Perhaps its growing size is catching up with it…
Hi IG,
Both these fund managers are known as pure growth managers that look to buy companies they expect to be “dramatically larger in a few years”. They take large positions. The Power American is 44% technology and 32% consumer cyclicals now, which makes it 76% in 2 growth-oriented sectors. It is aggressive, so it is not for everyone.
It is certainly more aggressive than the S&P500, so higher returns do not always lead to higher risk-adjusted returns. This is not because of size, since a fund in Canada is tiny in the American market. The fund goes in streaks. It outperformed by a lot in 2009-11, but lagged in 2012. The stats you quoted would vary quite a bit from year to year.
It does outperform the S&P500 by a lot, though. The total growth in the last 15 years is about 4 times the growth of the S&P500. I hope this works, but the chart tells the story:
https://securechart.globeinvestor.com/servlet/charting/?chart_type=png&lang=EN&fund_id=51285&chart_style=fund_line&period=INC&compare_index_id=3140&include=&return_type=TOTAL&chart_size=mediu
m&pi_mov_type=SMA&mav_1=&mav_2=&mav_3=&emav_1=&emav_2=&emav_3=&compare_fund_id1=&compare_fund_id2=&compare_fund_id3=&compare_fund_id4=&compare_fund_id5=&app=ga
Just to be clear, I’m not advocating this particular fund. I’m just supporting Tom’s article that this is one good example of a mutual fund that has widely outperformed its index. There are quite a few examples of this, when you look for them and know what to look for.
Ed
Ed Rempel, have you looked through Dynamic Funds Annual Reports; you can see that Noah has received a performance fee on his Power American funds. Upon review, Noah collected $23.73 million in 2019 and $66.17 million in 2020. Keep in mind that this is over and above the management fee. When you look at all fees charged compared to some of his peers, the fund charges more than double the expenses, and the annualized performance has been less than his Fidelity peer. Noah is one of the few managers that charges a performance fee.
Power American is not a hedge fund, but why is he charging fees as if it was one?!