A better way to assess Mutual Funds performace

With all of our other investment choices, be it stocks or trusts or bonds or cash, we all make our own decisions on what and when to buy and sell. Not so with mutual funds.

With mutual funds, we as income investors are paying someone else to make the security selection and market timing decisions. For that reason, we at the Money Reporter place special emphasis on how much we pay for that professional management, and how much we get back in return.

We could assess the performance of our list of recommended mutual funds by simply comparing the NAV at the end of 2013 with the corresponding figure at the end of 2012, or we could use the performance measures that the funds supply us with.

But we go further than that. We compare the percent return we got with the percent in fees that we had to give up to get that return.

We do this through a performance measure of our own invention called MER coverage. MER coverage compares how much the investor made relative to how much the fund charges in fees.

For example, if a fund charges an outrageous MER of 5% per year, we don’t really care as long as the fund makes a 50% return in a year. That would be a one-year MER coverage of 10, indicating that we made ten times as much money as we paid in fees. We’d prefer that to a fund that charges a 1% MER and makes a 2% one-year return, for a one-year MER coverage of two times.

Below we provide the one-year MER coverages for all of our funds. We also provide three-year, five-year and ten-year MER coverages based on the compounded returns for those periods, to see which funds have been more efficient at producing returns this past year, and these past years.

On that basis, all of our choices in Canadian Equity Fund category made more than it charged in the last twelve months. However, on a one, five, and ten-year basis it’s the iShares ETF that has performed the best. The PH&N Balanced Fund has been consistently good in its category as well.

Ultimately mutual funds should be looked at as long-term investments and so consistently high MER coverage over one, three, five and ten years is best. We encourage you to use the table below to see which funds are pulling their weight. After all, we’re paying them to perform, so let’s see the performance!

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