How to assess a fund’s performance

Regardless of the investment philosophy or style of a fund’s portfolio manager, the only solid information we have about a fund is its portfolio and its past performance.

The only solid information we have about a fund is its portfolio and its past performance.

When you look at the performance record of a mutual fund, here are five ways to interpret what you see.

■ Performance over the years. Most tables of mutual fund performance give you annual compound rates of return over several periods—usually one, three, five and 10 years. Some show returns over one, three and six months as well. You may or may not be impressed with the numbers you see. But what should impress you? We always stress the long-term results as the most meaningful. You’ll also want to make some kind of comparison, even if it’s just with inflation or GIC rates.

■ Performance compared with other funds. If you take the trouble to compare a fund’s results with those of other funds, be sure to make the comparison with similar funds. In general, you’ll want to compare the funds within an investment category. Categories include Canadian equity funds, US equity funds and global equity funds. Comparing a Canadian equity fund with a US equity fund won’t offer much help. It may tell you which market was stronger in the past, but won’t offer much insight into the quality of either fund’s management.

■ Performance compared with an appropriate index. Comparing a fund’s performance with the rest of the market is easier if you use an index in place of other funds. The index, if properly chosen, will let you know how well the entire stock market has done. Use the S&P/TSX Composite for Canadian equity funds, and for diversified US equity funds, the S&P 500 Index. Many specialty funds have a corresponding sub-index. For example, the S&P/TSX includes the Global Gold Index. When it comes to international equity funds, you should use the Morgan Stanley Capital International European, Australasian and Far East Index (MS EAFE Index). With global equity funds, the benchmark is the MSCI World Index. Keep in mind that many stock-market indexes don’t include the effect of dividends, while the returns quoted by mutual funds do.

■ Performance and volatility. Sources of information on Canadian mutual funds calculate volatility over periods of three, five, 10, 15 and 20 years. But even a fund that’s highly volatile in three years will likely remain so over longer periods. If a fund has generated high long-term returns with high volatility, it may go through shorter periods of low returns, or even losses. In fact, you may have to hold such a fund for several years to get an average return, let alone the high returns of the long term. What’s more, you may need money just as the fund enters a period of poor performance.

■ Steady returns year after year. If a fund is able to return steady profits year after year, chances are it has a low volatility rating. But more to the point, steadiness means the fund’s manager is able to deal successfully with most market conditions.

This is an edited version of an article that was originally published for subscribers in the May 15, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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