6.

Mutual Funds - Performance Measurement

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Investment
Products 6. Mutual Funds -
Performance
Measurement
Friday 12 December 2003

Résumé :
There are four major selection criteria to consider when choosing a mutual fund and evaluating its management.

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6. Mutual Funds - Performance Measurement

There are hallmarks of good fund manager's performance that transcend the quarter-by-quarter
fluctuations in the value of a fund. Some funds, like index and money market funds are evaluated on
their ability to track their respective markets and allow a somewhat passive management style;
others, due to their fund type require a more active involvement in the continuing management of the
fund investments.

There are four major selection criteria to consider when choosing a mutual fund and determining
whether its return is reasonable, given market conditions and the type of fund:

• Annual performance of the fund, excluding the affect of compounding,

• Fund management expense and management expense ratio (MER),

• Volatility of the monthly rate of return, and

• The fund's rank by quartile.

When looking at a fund's track record, consider annual rather than compound performance. While
compound performance illustrates the effect if an investor bought the fund and held it over time,
annual returns show the returns of each year separately. Displaying each year's annual results
separately exposes those years in which the fund posted negative returns. If negative returns are
embedded in the 3 or 5 year aggregate, it is more difficult to judge performance and risk.

There are other fees associated with mutual funds, in addition to sales or redemption charges that an
investor must pay. The management fee is the fee paid to the manager for investment management
services and is normally a percentage of the net asset value of the fund. Usually, the lowest
management fees are found for index and money market funds, for which there is less active
selection than for an equity fund. These charge the lowest among the fund families, usually around
1%.

The management expense ratio (MER) is the ratio of all fees paid by the fund to assets under
management, including custodial services, trading fees, and unit holder communications. The
management expense ratio is always deducted before the return is calculated. Mutual funds are
required to disclose both the management fee and the management expense ratio for the past five
fiscal years in the fund's prospectus.

When evaluating a potential mutual fund purchase, compare the management expense ratio with
other funds of the same or similar category.

The size of a fund can influence its ability to out perform its peers. Tremendous growth in returns
from investments in small capitalization companies can substantially influence a small fund's returns,
whereas the same performance when held in a larger fund will have less overall impact in total fund
performance. Although both small and large funds can invest in the same companies, the larger
fund's overall returns will be less affected by extraordinary growth in one or a few individual

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6. Mutual Funds - Performance Measurement

companies, since the investment is too small to make an impact. On the other hand in some markets,
such as the bond market, larger participants have an advantage through domination, access to new
issues, or superior pricing.

A fund's volatility relative to other funds can be measured by its standard deviation of monthly
returns. Standard deviation measures the variability of historical returns to determine the likelihood of
future returns. A fund's standard deviation is expressed as a number and represents the likely range
of fluctuation above and below a fund's average return. Rankings are used to distinguish lower risk
funds from higher risk funds.

Mutual fund performance is usually ranked by quartile, with performance measured against similar
types of funds. Both annual and compounded returns are available, so it's possible to see the affect
of a continuous year-over-year investment as well as the annual, yearly performance history. Returns
are quoted exclusive of management expenses. The quartile ranking system is used to evaluate a
fund manager's performance against others in the same market:

First (top) quartile Top 25% of performers

Second quartile Next 25% of performers

Third quartile Next 25% of performers

Fourth (last) quartile Last 25% of performers

Funds with consistent ranking in the upper quartiles may have better fund managers and will
generate more wealth over time for fund holders. Although it may be tempting to follow outstanding
performance, investors should avoid switching funds to be invested with the most recent first quartile
fund managers, unless they are consistently high performers.

The quartile ranking system above is particularly useful for comparing a fund manager with its peers.
When choosing a fund manager, an investor should consider factors other than the most recent year
or quarter's performance. Instead, an analysis should focus on the fund's long-term performance,
how long they have managed the fund, and the consistency of returns over time.

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6. Mutual Funds - Performance Measurement

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6. Mutual Funds - Performance Measurement

Mutual Fund Statistics - IFIC Members

Year Assets (billions $) # of Funds # Accounts (thousands)
1999 389.7 1382 45,752
1998 326.6 1030 40,948
1997 283.2 1023 32,826
1996 211.8 954 22.297
1995 146.2 916 15,295
1994 127.3 813 13,486
1993 114.6 633 8,928
1992 67.3 543 5,514
1991 49.9 505 4,533
1990 24.9 422 2,587

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