Value in monitoring your investments

Value in monitoring your investments

June 1, 2017

I recommend you monitor your investments to decide whether any changes need to be made.

Many Canadians own actively managed mutual funds. They provide a simple way to invest. Unfortunately, it is not that simple to evaluate their performance.

Actively managed mutual fund companies use performance advertising to attract investors. Not surprisingly, these ads tend to highlight successful past performers, but not all funds perform well.

The actively managed mutual fund manager decides which stocks, bonds, or other assets the fund will buy with investor dollars. Sometimes these managers are rated against other managers. That can be useful, but a more thorough analysis is often desirable.

A better way to evaluate the ability of mutual fund managers is to compare the return on investment they have provided to that of the underlying market they invest.

For example, if you own a mutual fund that invests in Canadian stocks, then it is beneficial to compare the investment returns of your fund against the underlying benchmark of Canadian stocks.

How did the Canadian stock market do? How did your mutual fund manager do when investing in Canadian stocks? This type of monitoring requires some adjustments to account for survivorship-bias.

Mutual funds that are introduced to the market are sometimes withdrawn or merged into other funds to hide poor performance.

Survivorship-bias occurs when poor performing funds are eliminated from the data, making the results look better than they actually are.

Research shows there is a high correlation of funds withdrawn from the market to those that have performed poorly.

Standard & Poor have been tracking the performance of mutual funds for many years. Its SPIVA® Canada Scorecard reports on the actively managed Canadian mutual funds against their benchmarks, corrected for survivorship-bias.

If a fund is pulled off the market, S&P will capture performance figures from those funds in order not to distort the accuracy of their evaluation.

S&P results for the period ending December 31, 2016 show

the performance of actively managed mutual funds has again been disappointing, relative to the markets they have been investing in.

Only 30 per cent of mutual funds investing in Canadian equity managed to outperform the Canadian equity benchmark over the five years ending December 31, 2016.

Zero mutual funds investing in US equity managed to beat that market over the same time period.

Finally, international equity managers only beat the underlying market 10 per cent of the time for the five years ending December 31, 2016.

All investors are encouraged to evaluate their investment performance in the light of the fees paid. If you are paying for superior returns, then you should receive them.

If you don’t get satisfactory returns after the cost of mutual funds are deducted, then it is advisable to look for other options.

The investment business is extremely competitive and more low-cost investment options are becoming available.

Decide if owning high cost, actively managed, mutual funds is to your advantage. If not, consider other low-cost alternatives.