Friday, April 13, 2001
Funds 2001: Canada's Top 200 Mutual Funds
The knack of this book is the selection of 200 funds that the editors of Investor's Digest think are the best. Their standard of selection is that funds must be at least three years old, have superior long term returns, represent variously Canadian, U.S., and international equities, balanced funds and dividend funds. They have cut this standard into finer groupings of large and small cap funds, regional and country-specific funds and sector funds.
It is interesting to see that the list of winners in this book excludes former stars like Templeton Growth Fund, a value-seeking operation that has disappointed many investors in the last five years. Yet the book includes AGF's American Growth Fund, a very successful but volatile portfolio of hot mid to small cap stocks. The book's data stops at October 31, 2000. That means that it does not take into account the bear market that developed in February and March, 2001 and does not track how funds have done in that environment.
Will the chosen 200 funds do well in future? There is no guarantee at all, not even a probability, for fund performance exhibits no persistence. Further, since the editors say that fees are not a variable in their measurement, there are high fee funds in the mix as well as low fee funds. But fees do matter, for if a Canadian equity fund charges a typical 2.4% of net asset value for ten years, the unitholder will be out of pocket 24% plus compounding. Assume a 7% rate of return and the fee cuts out more than a third of the investor's gross return. Fees do matter and one cannot disregard the fact that, at least among Canadian equity funds, fees are inversely related to returns over periods of 15 or more years. High turnover is also a determinant of return, for flipping stocks and incurring capital gains taxes for unitholders reduces the returns of taxable investors. Yet the book does not track tax efficiency or turnover.
All-Star Funds 2001 is a compendium of fund performance back to 1991 and a place to start in evaluating portfolios. But use the data with care, for the past is no guide to the future of mutual fund performance.