One of the things investors typically look at when assessing mutual funds is performance history. While historical performance is important, it’s just part of the story.
For example, a balanced fund that returned 2% during the bear market of 2008-2009 would have been cause for celebration. That same return last year would have left you wondering what went wrong. That’s why it is crucial to compare apples to apples when assessing fund performance. Here’s an insider’s look at some of the factors we take into consideration.
A fund’s returns are based on the aggregate performance of the securities it holds, less fees and expenses. But to really gauge how well it 4did, we need to look at the benchmarks that reflect the fund’s holdings.
A broad-based Canadian equity fund might use the S&P/TSX Composite Index as its benchmark. Meanwhile, a small-cap fund, or one focusing on tech stocks, would be better served with a different benchmark.
Amongst its peers.
Performance is relative, so it’s instructive to consider how a fund performed versus funds of a similar nature. Don’t compare the performance of a government bond fund to a technology stocks fund. A common measure of this kind of performance is quartile ranking. Look for a fund that consistently finishes in the first or second quartile of its peer group or similar-type funds.
Beyond the short term.
Equally important is recognizing that short-term numbers can be misleading. Every asset class has its day in the sun and its turn in the doghouse. Returns for a five- or ten-year timeframe are a better indicator of quality than the performance of just one or two years.
Ultimately the best marker of mutual fund performance is whether an individual fund is meeting the goals that your portfolio requires of it. A portfolio review is a great way to understand how each fund and your overall portfolio is performing for you.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
This newsletter is sponsored in part by Dynamic Funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performances may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.
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