Relative Performance

How average are your funds?

There has been a tremendous amount of change in the mutual fund industry. It is a full time job keeping up with fund company mergers, fund mergers, name changes and the continuous onslaught of new funds. With so many funds, how do you know if the mutual fund you are holding is good, bad or average?

Last year, the average mutual fund return was -11.49% out of over 4000 funds. Out of 35 categories in the mutual fund universe, only 11 showed positive returns. These positive categories were mostly conservative types of investments like bonds, money markets and fixed income.

If you owned a mutual fund that lost 10%, your financial advisor may tell you that you did really well considering what happened last year. While this may sound a little strange to have lost money and be told that you are doing great, there is some truth to the matter. In a year where 78% of all mutual funds lost money relative performance has become the benchmark for comparison.

What is relative performance?

Relative performance is simply looking at the performance of a fund and comparing it to the performance of other funds. Two of the most common relative benchmarks are the index comparisons and peer group (average) comparisons.

Index comparisons

Last year, the TSX composite return was -12.4%. If you had a Canadian Equity Fund that lost less than -12.4%, then it did well on a relative basis. In fact, only 194 Canadian Equity funds out of 490 funds were able to beat the index last year.

If we look at the American Equity funds, only 125 funds out of 473 were able to beat the S&P500 with a 1-year return of -22.7%.

Finally, if we look at Global Equity Funds, 250 funds out of 522 funds beat the Morgan Stanley (MSCI) index, which was down 21.9% last year.

Comparing to the peer group

The other benchmark is looking at the average. When looking at the average, it is very important to compare apples to apples and oranges to oranges. For example, when you are comparing the performance of a precious metals fund to that of a foreign bond fund, you are comparing two completely different investments. Instead, you should take a look at the fund you own and then compare it to other funds of the same type. If we continue our analysis of the Canadian, US and Global Equity markets, you can see the different average returns within those categories:

Average 1 year performance

Canadian Equity -12.02%
US Equity -24.48%
Global Equity -20.45%

As you can see, the average of these three categories was not too far off of the relative indices. Overall, it was a tough year for markets.

It is important to understand that most mutual fund managers are evaluated by their companies based on how they do compared to the relative index and also to their peer group (beating the average). Whether you agree or not, relative performance is a huge part of the mutual fund industry because no one can control the market or economic environment. Rather, we are all competing in the context of the environment that we are in.

A different benchmark

That being said, there is a new fund with a different kind of benchmark. Fidelity Investments has introduced a new global equity fund called The Fidelity NorthStarâ„¢ Fund. It is a unique because it has an absolute benchmark of 0%. Simply put, this means that the fund will try to never go below 0%. The fund does not care what markets do because in any environment it will try its best to preserve capital. This will be particularly attractive to conservative investors who do not like to lose money but still want some of the upside of equity markets. Make sure you do not confuse this with a guaranteed fund or segregated fund, as the Fidelity NorthStarâ„¢ fund has no performance guarantees. The managers are mandated to try not to lose money but it is not guaranteed.

My two cents

While I like the concept of a zero benchmark mandate, the Fidelity NorthStarâ„¢ fund is a new fund. Like anything else, I would encourage you to do a little homework before you rush out and buy this fund. The fund has two veteran fund managers with proven track records in Joel Tillinghast and Alan Radlo.

While your mutual funds like others have lost money, there are still funds that have managed to do better than others. It is a good time to review your holdings as many funds have track records that have gone through both an up cycle and a down cycle. My main goal is to offer you some thoughts on determining how well you funds have performed.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

Leave a reply