Measure Past Performance

Measuring the past performance of a fund or its “track record” over one, three, five and ten years is probably the most widely used criterion for fund selection. If possible, it’s also recommended that you look at the annual performance of a fund and compare it to the benchmark and its peers. A fund that had a fantastic return in one year, but has underperformed for many years, may show up as having a superior annualized return; however, unless you held it during the good year, you’re likely to be disappointed in the future.

Where Do You Look?

You can find past performance data on each investment fund report. Reports are updated several times per year. In addition, there are many good online sources of Canadian investment fund information including:

Use Benchmarks for Comparisons

For purposes of measuring the success of your portfolio, compare each component to its appropriate benchmark. An index is used as a benchmark to measure the performance of a fund. Each asset class has its own benchmark. Compare each fund’s quarterly, annual and annual-since-inception returns against its market index. The following table provides a list of the major benchmark indices.

Asset Class

Index

Cash & Equivalents

Scotia Capital Markets 91 Day T-Bill Index

Fixed Income

FTSE TMX Canada Universe Bond

Canadian Equity

S&P/TSX Composite Total Return Index

U.S. Equity

S&P 500 Index

International Equity

MSCI EAFE Index

 

The FTSE TMX Canada Bond Universe tracks Canadian bonds. It holds a blend of government (federal, provincial and municipal) and corporate bonds. There are three term-to-maturity sub-indices (five years or less, five to ten years and greater than ten years). Corporate bonds are broken down by credit rating and industry groups. The S&P 500 Index tracks 500 of the largest U.S. companies (by capitalization) representing major industry sectors.

Sub-asset classes, such as small-cap (capitalization) Canadian equity and emerging market equities, have their own indices. Comparing Canadian equity funds against the Canadian equity index and U.S. equity funds against the U.S. index is the only fair way to judge performance. The two indexes represent different companies and have very different industry allocations.

Benchmarks and Passively Managed Funds

Index funds and index ETFs (exchange traded funds) are designed to track an index. Expect past performance to mirror the index they are tracking.

Caution: Rates of return may be lower than the benchmark index. This is due to two factors:

  • Investment fund fees reduce your return.
  • Imperfect tracking to the index will impact performance, for better or worse.

Compare Actively Managed Funds

It is important to compare actively managed funds. One way to do this is to look at the investment funds’ rates of return for the periods starting three years and five years ago and ending today. Identify investment funds that, for those two time periods, achieved the following:

  • Average or above average returns when compared to:
    • Similar funds
    • Its benchmark index
  • Consistent performance between these two time periods (if there is information available for more time periods, even better)
  • Performed well during various market conditions (that is, how did the fund do against its peers in a rising market? How did the fund do in a falling market?)

The key to an investment manager’s success is consistency, not the number of home-run hits. Find out if there have been any meaningful changes to the personnel managing the fund.

Use Quartile Returns

Quartile rankings are used to divide investment funds into one of four quartiles (of 25% each and adding up to 100%) based on past performance. In normal market conditions, index funds can be expected to place in the second or third quartile, as they mirror their respective indices, minus the fees.


Should an investor look at the returns for the past 12 months? Yes, but only to see if there is an unusual pattern. If the fund is well behind (or well ahead) of the competition, it raises questions such as:

  • Has the investment style changed?
  • Has there been a change in the investment team?
  • Are they simply out of step with the market cycle?

An investment fund experiencing a sharp decline in its one-year performance (e.g., if a fund loses 20% relative to its peers) must regain 25% just to catch up. Will the investment manager now have to, or choose to, take greater risks to recover and move ahead?

Measure Your Advisor’s Performance

At least annually, ask your investment management professionals to provide updates and analysis of the investment funds held in your portfolio. Past performance against benchmarks and similar funds should be checked. In addition, investment funds and their managers should be continuously monitored to ensure they maintain and deliver the style of management for which they have been hired.