Investing

Snapshot performance: What do your investments look like today?

This year, Dynamic Mutual Funds won 10 awards at the Morningstar Canadian Investment Awards. Columnist, Jonathan Chevreau was quick to write an article posting some data showing how a number of Dynamic Mutual Funds have outperformed the index by pretty significant margins. Chevreau has been a vocal critic of high MER funds and subscribes to the merits of passive investing and low-cost exchange-traded funds (ETFs). But this article shows some support for Dynamic Mutual Fund’s success.

Both the Canadian Couch Potato and the Canadian Capitalist came out with their own posts re-iterating the merits of passive and index investing despite Dynamic Mutual Fund’s success. Canadian Capitalists recognizes investing is a game of probabilities. You will always hear some success stories of active managers who actually beat the index but statistics have shown that fewer managers beat the index than ones that do. Probability is one of the three Ps of investing.

Canadian couch potato highlights the difficulty of choosing the winning mutual funds that will outperform and choosing the right time consistently is impossible. There are so many choices to choose from and even within the Dynamic line up, it’s not unusual to see 7 out of 100 funds do well. Both of these articles make great points and are definitely worth a read.

The last point raised by Canadian Capitalist is a very relevant message that motivated me to write this article . . . the perils of snapshot performance.

What is snapshot performance?

As a guy who likes numbers and statistics, I’ve always said I can make any investment look good with the facts. It just depends on what facts I want to show you.

One of the problems in the investment industry is a 5 or 10-year performance number can be misleading because it only takes one or two good years to make a long term number look good. When you look at a fund or an investment at a single point in time, you are looking at a snapshot of that investment at one single point in time and sometimes that can trick you. It’s possible that Dynamic could have a really lousy year next year and the picture will look different than it does today.

In my first book Mutual Fundamentals, I looked at snapshot performance extensively and questioned rating systems and awards for mutual funds because they tend to look in the rearview mirror. In fact, I did an informal study years ago and tracked winners of the annual mutual fund awards and how they did the following year. They had a greater than 50% chance of underperforming the following year.

So what’s my point?

I think Dynamic has had some great success and their recent awards are a testimonial that they have done some good things to earn the recognition.

The fact that they won this year does not mean they will win next year or the year after that which is precisely why the investment industry says “Past performance is no indication of future performance”. It would be interesting to see if a mutual fund has won the same award two consecutive years in a row and if so, how often that has happened. I’m betting not very often.

Be careful of awards, ratings, and especially snapshot performance. Good research leads to good decisions and investors should use more than these things to choose good quality investments. For example, Chevreau, Canadian Capitalist, Canadian Couch Potato and myself all advocate awareness of fees because they are a significant determinant of long term performance.

Fees probably have something to do with the statistics that show passive index investors have probability is on their side over the long term. that being said, there will always be some active managers that steal the show every year. The problem is they are rarely the same people, funds or investment year after year.

A blast from the past

Over 10 years ago, I launched my first book Mutual Fundamentals, which quickly hit the best selling lists and became a best seller. Although that book is now out of print, I am giving it away from free for my VIP Members. The examples in the book are old but the points about research are timeless. If you are interested in downloading Mutual Fundamentals, just visit my website.

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