Understanding fund performance

Knowing how to assess the investment return of a fund can help you determine if it aligns with your financial goals and make informed investment decisions. Some things to keep in mind include how the fund has behaved over time and in different economic or market conditions, whether it’s doing what it’s designed to do, and its role in your portfolio.

Getting the fund facts

A good place to start with a market-based fund is the fact sheet, which you can get from the financial institution or investment company that offers it. The fund fact sheet gives a detailed overview that can help you understand what that fund is designed to do, how it does it, what type of investor it’s intended for, and how it’s performed in the past.

While fact sheets vary, here’s a sample of what you’ll usually find on one that can give you important context for what the fund invests in, how it behaves, and whether it could be right for you:

• The fund’s objective and investment strategy—This is what the fund is trying to achieve, such as provide long-term growth or generate income, and how it tries to achieve it; for example, by investing in certain securities or assets classes or by matching the returns of a group of investments, also known as an index. It may also indicate if the fund is actively or passively managed.
• The asset class—This helps you see if the fund would be a good fit in your portfolio’s asset allocation strategy. A diversified portfolio contains a mix of investments from various asset classes, such as equities, fixed income, and money market funds. Each one has a role to play in your portfolio’s performance and its diversification; for example, by providing growth, income, stability, or protection against inflation.
• Risk or volatility rating—Investing involves certain risks. The risk level is determined by the fund’s volatility, or how quickly and significantly it can go up or down under certain market conditions.
• Past performance—The annualized rates of return (ROR), expressed as percentages, show the fund’s gains or losses over several periods since it launched. Depending on how long the fund has been around, you’ll usually see the ROR for one, three, five years, and more. Over the longer five- to seven-year period, there may be at least one year when markets were down and a few years where the markets were positive. Although past performance is no guarantee of future results, it can give you an idea of how the fund performed across different market cycles and economic conditions.
• Benchmarks—The fact sheet might show returns for indexes with similar strategies as the fund you’re looking at so you can see if it’s getting similar results. For example, you might see the S&P/TSX Composite Index used as a benchmark for Canadian equity funds.

Checking your investments

When looking at your statement or checking your account online, you’re likely to start by looking at the change in value to see how your investments performed over a particular period.

That will give you the big picture, but the change in value includes everything: contributions, withdrawals, expenses, and growth from investment returns. To dig a little deeper into how the funds in your portfolio are performing, here are the main indicators to look for.

Your personal rate of return

Unlike the ROR on the fund fact sheet, which shows a fund’s performance since it launched and doesn’t take fees or expenses into account, your personal ROR shows you how your investments have performed for you from the time you started investing in them and after investment management fees (IMF) have been deducted.

Typically, your account statement will show your personal ROR for all your investments combined and the ROR for each fund in your portfolio.

There are two recognized ways that your personal ROR can be calculated, and they each give you a different view of returns.

1 The time-weighted ROR calculation doesn’t include any contributions, withdrawals, or transfers you made. This isolates the actual fund performance, which is useful for comparing funds against a benchmark or another fund.

2 The money-weighted ROR calculation factors in the amounts and timing of your contributions, withdrawals, and transfers. This gives you a more complete picture of how your investment is doing and shows the impact of your investment decisions.

Check against benchmarks

Compare your fund’s performance against the return for funds in the same category or to an index that tracks a group of selected investments, like the benchmarks you might find on the fund fact sheet. Depending on the fund’s objective, you’re looking for it to either match or outperform the benchmark.

Keep an eye on fees

Fees and other expenses reduce your returns. Check your account statement to see how much you’re paying for a fund relative to how much money it’s making you.

Making informed decisions

When assessing a fund, it’s easy to get daunted by the amount of information available. Focusing on key indicators can help demystify fund performance and give you a better idea if a fund is a good fit for your portfolio and for your financial goals. It can also help you prepare for your next meeting with your financial advisor to go over your portfolio.