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Elusive Returns

Have you ever had that nagging feeling that the returns published for investment funds don't match the returns you have experienced? You are not alone.

Aaron Brown and Duff Young of the Toronto based FundMonitor.com have released a new study showing that only 1 out of 17 investors matched a fund's long-term record. Their study shows that 10 year returns are elusive simply because investors don't buy and hold.

No matter what the current market climate, fund companies have always been able to point to their long term returns as evidence of their stellar work. Indeed, most funds do very well over time, so the managers have much over which to be proud. The problem, as this study points out, is that while funds do fine, people do not. That's because it turns out that only 1 out of 17 investors in Canada's biggest 100 funds have matched or exceeded their fund's published 10 year rate of return for the period ended Sept 30, 2002.

Explaining how Fund Monitor arrived at that conclusion will require a little background on the difference between the published returns (which are called "time-weighted") and the returns earned by investors (called "dollar-weighted") because they consider the timing of cash flow).

Time-Weighted Rate of Return	Dollar-Weighted Rate of Return
Shown in ads and newspaper listings Good for measuring fund managers' skill Assume buy and hold for entire period	Never before published in Canada* Considers monthly cash flows from investors Measures the average investor experience Highlights problems from huge net sales before a fall

*A FundMonitor exclusive

The rate of return shown in the newspaper relies on the assumption that a person buys and holds the fund for the full period (time-weighted). The study shows that this is extremely rare.

Fund Monitor studied the 100 largest long-term funds in the Canadian mutual fund industry. What they discovered was startling! For ten years ending September 30, 2002 the average investor posted annual returns 4 percent lower (annually) than the actual published fund returns. That's about one-third of the total wiped out because of selling the fund after a drop or, more commonly, buying the fund after it's gone up substantially. Among investors in these large funds, only one in seventeen can say that they outperformed their fund over the period.

More on the concept of measuring dollar-weighted returns can be found in our simple tutorial. Cash flow figures for the funds are used. The cash flow figures used for the funds take both deposits and redemptions into account.

10 years ended September 30, 2002

Fund Name	Total Assets	How the Fund Did*	How the Investors Did*	Difference Due to Poor Timing
Templeton Growth	$7.8 billion	9.6%	4.3%	5.3%
Royal Balanced	$6.4 billion	7.1%	4.9%	2.2%
Trimark Select Growth	$6.0 billion	13.4%	11.4%	2.0%
AGF International Value	$5.7 billion	13.5%	4.9%	8.6%
Investors Dividend	$5.6 billion	8.4%	7.7%	0.7%
Fidelity International Portfolio	$4.5 billion	9.6%	-0.1%	9.7%
Templeton International Stock	$4.1 billion	9.9%	1.4%	8.5%
MD Growth Investment	$3.5 billion	11.2%	9.9%	1.3%
Trimark Fund SC	$3.5 billion	15.1%	14.4%	0.7%
Royal Canadian Equity	$3.0 billion	9.8%	7.0%	2.8%

The table shows that investors in some funds worse timing than others. Consider a fine fund like AGF International Value. This massive fund has recovered nicely from the loss (in June) of manager Charles Brandes. But its investors' problems started long before the recent manager turnover. You see, the fund didn't get popular until well after it had earned stunning returns for years. It had earned blockbuster returns for its first 10 years that put it ahead of 98% of its rivals. But still, the fund had only $3-billion in assets. So, in a relative sense, not many people had been around to enjoy those stellar numbers. Most people bought in much later, after the fund had continued to tear up the charts. For example, in the 24 months ending March 31, 2002, the fund had net new sales of an incredible $4-billion - outselling almost every single one of the 4,000 other funds in Canada. Just then, the market slumped and returns have since been more modest, with the fund down 30 percent in the first three quarters of 2002. Since most of its net sales occurred so late in the period - and so close to the market's recent slump - most people simply have not done that well. Yes, a constant dollar invested a decade ago in the fund would have earned 13.5% annually - enough to turn that dollar into $3.50. But the average investor has earned returns close to that of GIC's - a gap of nearly 10 percentage points annually.

What Brown and Young's research demonstrates is that investors should know their manager's style, mandate and hold the course. As investment guru, Warren Buffett once said "if you can't hold an investment for 7 years, you shouldn't hold it for 7 days".