Investors Group Fund Lags the Market

When funds get really big they have a tendency to follow the market.  Investors Group's Investors Canadian Equity-A has assets of over 1 billion dollars.  Its management expense ratio (MER) is 2.66%.

An Investors advisor once said that actively managed funds can do better than the market, or passively managed index funds with very low fees (e.g., Horizons' HXT).

A few years back I tested this theory and found that many Investors Group funds followed the market and lagged behind average returns.  The following graph revisits this test and compares Investors Group's Investors Canadian Equity-A with the TSX Composite Index.  The index total return is shown in red and the Investors Group fund in blue.  Over the past 5 years the Investors Group fund has lagged by about 12%.

What is the compound effect of a management fee of 2.66 % each year for 5 years?  Its a loss of 14%.  So if the actively managed fund does a little better than the index, then it doesn't do it by much, and not enough to justify the management fee.

The other things advisors have said is that Investors Group funds are not correlated to the overall market and have holdings that don't overexpose then to sectors that are overweighted in indexes.  Without going a formal correlation of Investors Canadian Equity and the index, the graph repeats what I found several years ago which is a strong correlation between the fund and the index.  So why buy the fund?

Here is the same chart for a 10 year period.  Do you notice the correlation?  The big fund just moves with the market.  The overall movement in values year to year and month by month are closely aligned between the fund and the index.

Based on performance is there any reason to buy the Investors Group fund instead of a low cost index fund?  I'm not strictly against holding funds or against fees as large as the Investors Group fund fees.  But those fees have to demonstrate value somehow to be justified.  Smaller, more nimble funds are more likely to achieve returns that can beat the index.