Through bull and bear
Peter Verberg. Canadian Business. Toronto: Mar 31, 2003.Vol.76, Iss. 6; pg. 18, 1 pgs
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Abstract (Document Summary)
When the prospects for the market are hard to discern, people sit on the sidelines.
Money market funds now make up seven of the 20 biggest mutual funds in Canada in
terms of total assets. Many investors will stay in cash longer than they should paralyzed by the three-year bear market. The investment environment is especially
disheartening for those who first entered the market in the late 1990s, put their faith in
professional fund managers - and discovered their money would have been safer tucked
in a mattress. The average annual return for Canada's 12 largest equity mutual funds
since 1998 ranges from 5.6% down to -4.9%. Half of the funds returned less than a
money market fund over the five-year period.
Full Text (740 words)
12 largest mutual funds in Canada*
Confusion reigned supreme this RRSP season. Canadians rushed to top up their
contributions before the March 3 deadline, but now lay awake wondering what to do with
all the new cash in their investment accounts. The markets are depressed, the US
economy seems headed for a double-dip recession, and the world is on edge over Iraq.
Contrarian money managers say it's a great time to buy, but their opinions are suspect.
Investment superhero Warren Buffett wrote in his annual letter to Berkshire Hathaway
shareholders at the end of February that despite three years of falling stock prices he
could find very few issues that even mildly interested him. "That dismal fact is testimony
to the insanity of valuations reached during The Great Bubble," observed Buffett.
"Unfortunately, the hangover may prove to be proportional to the binge."
When the prospects for the market are hard to discern, people sit on the sidelines.
Money market funds now make up seven of the 20 biggest mutual funds in Canada in
terms of total assets. Many investors will stay in cash longer than they should-paralyzed
by the three-year bear market. The investment environment is especially disheartening
for those who first entered the market in the late 1990s, put their faith in professional
fund managers-and discovered their money would have been safer tucked in a mattress.
As the table on this page shows, the average annual return for Canada's 12 largest
equity mutual funds since 1998 ranges from 5.6% down to -4.9%. Half of the funds
returned less than a money market fund over the five-year period.
It's not surprising, therefore, that many mutual fund investors simply gave up on the
stock market in 2002. Those who stuck around face some difficult choices in the year
ahead. The industry would have you believe otherwise, of course. Funds are often
portrayed in advertisements as the ultimate stress-free approach to investing, but that
only works if you're lucky enough to find a good fund manager who can navigate the
market to produce better-than-average returns at a reasonable price. Too many money
managers deliver inferior results-and get paid handsomely for it. They get rich; their
unitholders get squat.
How does a person find a capable fund manager? One method is to look at past
performance-the assumption being that a manager who beat the average in the past is
likely to keep doing so in the future. Intuitively, it seems like a good approach, but the
evidence can be somewhat contradictory. To test the theory, I looked at the average
annual return for Canada's largest equity funds, over two consecutive five-year periods,
starting in 1993. Four of the top six performers from 1993 to 1998 also made it into the
top six in the past five years. Those four included two Trimark funds (Select Growth and
Trimark SC), Fidelity Canadian Asset Allocation and AGF International Value.
Interestingly, the four funds managed to outperform their peers in two distinct market
cycles-a speculative bull and a take-no-prisoners bear.
However, past performance was not a reliable guide in the case of the two Templeton
funds. They came in first and fourth in the 1993-1998 period, but were at the very bottom
of the heap in the five years that followed. In fact, Templeton International Stock fund
went from first place to twelfth under fund manager Don Reed. It's also instructive to look
at more recent data-the last three years-to see how each of the fund managers
performed during the bear market. All three Trimark funds did well compared to the
average, posting annual returns ranging from 4.1% to 6%. However, both Fidelity
Canadian Asset Allocation and ACF International Value have taken a turn for the worse,
posting three-year returns of 0.5% and -0.2%, respectively. AGF's onetime star fund's
fallen on hard times since its former manager, Brandes Investment Partners, was
replaced by Harris Associates.
Among the top 12 funds mentioned here, Trimark's look the most compelling. However,
the universe of smaller funds will have other examples of consistently strong performers;
I merely looked at the 12 biggest for convenience. Past performance can't guarantee
future returns-but it's more reliable than a blind guess.
[Sidebar]
How do you find a capable fund manager? Past performance can't guarantee future
returns-but it's more reliable than a blind guess