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Why Didn't I Earn That Much
(An Article From Global Strategy)

Are you kicking yourself-or struggling to find another cliche' to describe your disappointment- because you didn't invest in a precious metals funs last year? If you've read a newspaper recently, you've probably noticed that some of those funds posted returns of more than 70 per cent in the first nine months of 1996.

How about the stodgy Canadian equity fund that you do own? A fund table in a newspaper might tell you that the fund has earned, say, a one-year return of 17 per cent. But when you calculate your return from your statement, you don't get the same number. Not only that, the fund has failed to beat the TSE 300 Composite Index , and it doesn't appear in John Q. Fund Reporter's story in the same issue, "The 10 Best Mutual Funds In Canada." While you're at it, just look at the 20-per-cent-plus-one-year returns trumpeted in some of the Canadian equity fund advertisements!

If reading newspaper stories or mutual fund ads makes you anxious, you should probably talk to your investment adviser about why you shouldn't pay so much attention to short-term fund performance.

Look Beneath the Surface
Take any list of the 10 top-performing funds over the past year. Newspapers and magazines love printing those lists- and some of them do it every month. But if you follow those lists regularly, you've probably noticed that the bulk of the top 10 over any one year period tend to have holdings in one hot sector, or just a few companies in that sector. In 1993, it was Latin America. In 1995(after Latin American funds nose-dived in late 1994) technology funds moved to the head of the class. This year, the hot sector has been gold-and much of the most spectacular returns have been generated by just a few stocks, including Arequipa Resources and Bre-X Minerals. But those hot returns generally don't last. And no responsible investment adviser would recommend that you place all your savings in one volatile sector or one company. OK, you say, but why didn't I even get the return on my fund listed in the newspaper's fund table? It might be a good idea to check the exact dates and time periods used in the fund tables and compare them with the dates on your statements. The one-year,three-year and five-year compound returns cited by most newspapers can suffer from so-called end-point bias. All those returns can rise dramatically if a fund has climbed sharply in the final weeks-before the cutoff date used by the paper to calculate its numbers.
Why Isn't My Fund Beating The Index?
Very well, you say, if the manager is such a pro, shouldn't he or she beat the index all the time? That is difficult for several reasons. First, mutual funds are required to keep a portion of their holdings in cash to handle daily transactions. When markets are soaring, having 5 per cent of fund assets in cash-earning little or no interest-lowers returns. As well,more cash usually flows in during market upswings. It takes the manager a while to find places to invest that money. Remember also that mutual fund returns are quoted net of management fees, while index returns are not. The costs of trading stocks and bonds,providing statements and other expenses are included in the fund's management fees. For a typical Canadian equity fund, these fees range from 1.5 to 3.0 per cent each year, which gives an index a tremendous head start in any comparison. On a $1,000 investment, these fees work out to between $15 and $30. Compare that with the annual service charges on a basic bank assount-which pays little or no return. Over time, indexes also suffer from a "survivorship bias"-big winners on the market are added and losers are dropped. Last year, for example, troubled clothing retailer Dylex and the now-defunct real estate developer Bramalea Ltd. were amoung the companies dropped from the Toronto Stock Exchange 300 index, while successful mining companies such as Goldcorp and Diamond Fields Resources were added.
Is Reading Believing?
What about newspaper and magazine selections of the "best" mutual funds? They aren't that common in Canada yet. But in the United States, the track record of such rankings is far from encouraging. Bob Fischer, a financial planner in Richmond, Va.,commissioned a statistical study of 1992 ratings of U. S. funds by four magazines: Business Week, Money, Forbes and Kiplinger's. Fischer published the results in May 1995. The study found"absolutely no correlation of any kind between mutual fund ratings and future performance." Investors should look carefully at any system used to rate or rank funds. How many years the fund has generated a higher return than GICs and how many years it has lost money.
Returns Have To Be Put in Context
How does the fund compare with other funds in its category? How well does it stack up against others with comparable levels of risk? As well, no matter how good any rating or ranking system is, looking at the fund's track record is only part of an investment decision. Individuals also have to consider how it fits in with their own means and objectives. A detailed discusssion with an investment adviser is the best way to address both aspects of that issue-no matter what any newspaper or magazine says.

	Look Beneath the Surface Take any list of the 10 top-performing funds over the past year. Newspapers and magazines love printing those lists- and some of them do it every month. But if you follow those lists regularly, you've probably noticed that the bulk of the top 10 over any one year period tend to have holdings in one hot sector, or just a few companies in that sector. In 1993, it was Latin America. In 1995(after Latin American funds nose-dived in late 1994) technology funds moved to the head of the class. This year, the hot sector has been gold-and much of the most spectacular returns have been generated by just a few stocks, including Arequipa Resources and Bre-X Minerals. But those hot returns generally don't last. And no responsible investment adviser would recommend that you place all your savings in one volatile sector or one company. OK, you say, but why didn't I even get the return on my fund listed in the newspaper's fund table? It might be a good idea to check the exact dates and time periods used in the fund tables and compare them with the dates on your statements. The one-year,three-year and five-year compound returns cited by most newspapers can suffer from so-called end-point bias. All those returns can rise dramatically if a fund has climbed sharply in the final weeks-before the cutoff date used by the paper to calculate its numbers. Why Isn't My Fund Beating The Index? Very well, you say, if the manager is such a pro, shouldn't he or she beat the index all the time? That is difficult for several reasons. First, mutual funds are required to keep a portion of their holdings in cash to handle daily transactions. When markets are soaring, having 5 per cent of fund assets in cash-earning little or no interest-lowers returns. As well,more cash usually flows in during market upswings. It takes the manager a while to find places to invest that money. Remember also that mutual fund returns are quoted net of management fees, while index returns are not. The costs of trading stocks and bonds,providing statements and other expenses are included in the fund's management fees. For a typical Canadian equity fund, these fees range from 1.5 to 3.0 per cent each year, which gives an index a tremendous head start in any comparison. On a $1,000 investment, these fees work out to between $15 and $30. Compare that with the annual service charges on a basic bank assount-which pays little or no return. Over time, indexes also suffer from a "survivorship bias"-big winners on the market are added and losers are dropped. Last year, for example, troubled clothing retailer Dylex and the now-defunct real estate developer Bramalea Ltd. were amoung the companies dropped from the Toronto Stock Exchange 300 index, while successful mining companies such as Goldcorp and Diamond Fields Resources were added. Is Reading Believing? What about newspaper and magazine selections of the "best" mutual funds? They aren't that common in Canada yet. But in the United States, the track record of such rankings is far from encouraging. Bob Fischer, a financial planner in Richmond, Va.,commissioned a statistical study of 1992 ratings of U. S. funds by four magazines: Business Week, Money, Forbes and Kiplinger's. Fischer published the results in May 1995. The study found"absolutely no correlation of any kind between mutual fund ratings and future performance." Investors should look carefully at any system used to rate or rank funds. How many years the fund has generated a higher return than GICs and how many years it has lost money. Returns Have To Be Put in Context How does the fund compare with other funds in its category? How well does it stack up against others with comparable levels of risk? As well, no matter how good any rating or ranking system is, looking at the fund's track record is only part of an investment decision. Individuals also have to consider how it fits in with their own means and objectives. A detailed discusssion with an investment adviser is the best way to address both aspects of that issue-no matter what any newspaper or magazine says.

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