During a portfolio review, a client, Mr. Davies, expresses concern about the volatility of his actively managed Canadian equity fund. The fund has underperformed its benchmark, the S&P/TSX Composite Index, by 2% annually over the last three years, net of fees. His overall portfolio is 60% Canadian Equity and 40% Canadian Fixed Income. He asks for a recommendation to improve his Canadian equity returns and reduce fees. What is the most appropriate recommendation?

Question: During a portfolio review, a client, Mr. Davies, expresses concern about the volatility of his actively managed Canadian equity fund. The fund has underperformed its benchmark, the S&P/TSX Composite Index, by 2% annually over the last three years, net of fees. His overall portfolio is 60% Canadian Equity and 40% Canadian Fixed Income. He asks for a recommendation to improve his Canadian equity returns and reduce fees. What is the most appropriate recommendation?

Answer options:

• Suggest increasing his allocation to the actively managed Canadian equity fund, expecting a rebound in performance.
• Recommend reducing his Canadian equity exposure and reallocating to Canadian fixed income to lower overall portfolio risk. ✅ Advise replacing the actively managed Canadian equity fund with a low-cost S&P/TSX Composite Index ETF to reduce fees and track the benchmark more closely.
• Suggest investing in a different actively managed Canadian equity fund that has outperformed its benchmark over the last 12 months.

Correct answer: Advise replacing the actively managed Canadian equity fund with a low-cost S&P/TSX Composite Index ETF to reduce fees and track the benchmark more closely.

Explanation: Underperformance relative to a benchmark coupled with high fees suggests that a low-cost index ETF could be a more efficient investment choice. This aligns with reducing fees and aiming to capture benchmark returns, a common strategy when active management consistently underperforms.