As retail investors continue their inexorable slouch toward passive investing, we remain champions of the active approach.

That’s not just out of self-interest. Although we’re primarily stock pickers, we believe pooled investment vehicles such as mutual funds and closed-end funds still play an important role in most investors’ portfolios, including our own.

And we don’t just want to settle for the performance of a particular index—or even one of those custom benchmarks Frankensteined together by the exchange-traded fund purveyors on Wall Street. When we invest in a fund, we actually hope to beat the market, at least over the long term.

But we’re also willing to go where the data take us. And if that means passive investing has produced superior returns in a particular niche, then we’ll happily concede it.

Unfortunately, when it comes to Canada, there just aren’t a lot of funds from which to choose.

Among conventional open-end mutual funds, there’s just one Canada-specific offering: Fidelity Canada (FICDX).

While there are six Canadian-oriented exchange-traded funds (ETFs) on the market, just three have been in existence for five years or longer. And of those three, just one has managed to generate decent returns: iShares MSCI Canada (NYSE: EWC).

Given the paucity of options, we totally expected the passively managed EWC, which tracks the performance of the MSCI Canada Index, to beat the actively managed FICDX.

Turns out it can still pay to have a human being at the helm: FICDX bested EWC over the trailing three-year, five-year, 10-year, and 15-year time periods.

However, one complication in analyzing Fidelity Canada’s returns is that four different portfolio managers have led the fund over the past 15 years.

The current fund manager, Risteard Hogan, came on board in January 2014. During that time, FICDX beat EWC by 6 percentage points, which is a pretty sizable margin.

But that time period is simply too short to draw any conclusions about Hogan’s ability to beat the market over the long term. Beyond that, he is still relatively new when it comes to running a fund, with several different stints at various Fidelity funds since transitioning from equity analysis to portfolio management back in 2010.

In this case, therefore, risk-averse investors might prefer to go with the steadiness of the passive approach, as opposed to the uncertainty of the active approach, especially since there’s no guarantee that Fidelity won’t swap out fund managers again.

On the income front, EWC also offers a somewhat higher yield than FICDX, at 2.1% versus 1.3%. But since the portfolios of both funds will change over time, it’s likely that those yields will too.

The ETF’s biggest long-term edge is expenses. EWC’s annual expense ratio is just 0.48% compared to the princely 1.14% for Fidelity Canada, though in fairness it should be noted that the latter’s expense ratio is actually well below average for actively managed international funds.

Up a River

Fans of active management have another option beyond open-end mutual funds, thanks to their somewhat more obscure brethren—closed-end funds (CEFs).

Among our legacy holdings, the one CEF that many subscribers seem to own is Canoe EIT Income Fund (TSX: EIT-U, OTC: ENDTF).

Unfortunately, Canoe has not managed to beat the benchmark S&P/TSX Composite Index on a net asset value (NAV) basis, though over medium- to long-term periods, it has managed to keep pace with the market.

On a price basis, however, the CEF has occasionally managed to outperform the market over certain long-term periods, perhaps due to the attraction of its high distribution rate, which based upon a monthly distribution of CAD0.10, or CAD1.20 annualized, is currently around 10.9%.

Naturally, that high yield does not come courtesy of the fund’s portfolio of mostly blue-chip stocks. Instead, Canoe’s management uses leverage to enhance its distribution, with borrowings last reported as equivalent to nearly 12% of assets (the fund is permitted to borrow up to 20% of total assets). The downside of leverage is that it can take a bite during bearish periods.

The other factor behind Canoe’s high yield is that the fund presently trades at a 14.6% discount to NAV. Unlike open-end funds, CEFs have a fixed number of shares, which allows the unit price to deviate from the fund’s underlying value.

While we love having the opportunity to buy a slice of assets at a substantial discount to their market value, bargain hunters should be aware that the fund trades at a persistent discount to NAV. And that discount has regularly averaged 12.5% over the past five calendar years.

That discount would be more compelling if the fund’s unit price were to significantly narrow the gap with its NAV. But since 2011, Canoe’s unit price has never gotten any closer than a 7.7% discount to NAV.

Our main concern about the fund’s high distribution is that in some years it has been supported by returning unitholders’ own money net of management fees, otherwise known as return of capital. Last year, for instance, return of capital accounted for 30% of the annualized distribution and 2.5% of the fund’s net assets at the outset of the year.

It’s important to note that return of capital isn’t always destructive to shareholder value. Sometimes fund managers return capital to shareholders so that they can let their winners run, rather than be forced to take profits prematurely.

Nevertheless, we remain leery of funds that engage in this behavior year after year, especially when they’re longtime market laggards. Sell Canoe EIT Income Fund.