Mutual Funds in 2013

Most retail investors (individuals, rather than institutional portfolio managers) invest in the markets through mutual funds, and so we think it would be interesting for our readers to know how well mutual funds performed in 2013. First, let’s consider some basic information about funds. Mutual funds are professionally managed collective investment pools that invest their money in a variety of securities. Although mutual funds are organized into many different categories, the predominant categories are: money market funds, bond (fixed income) funds, stock (equity) funds and balanced funds (holding bonds and stocks). Some categories of mutual funds may focus on a geographic region or a specific investment strategy.

Mutual funds can be open-ended or close-ended. The most common are open-ended funds, where investors can buy or sell units of the fund at any time at their Net Asset Value (NAV). In closed-ended funds, the investor can sell the shares, also at NAV, but only at the designated date of closure of the fund. A fund’s NAV equals the market value of its holdings less the liabilities. NAVs are generally calculated at the end of each trading day.

One of the major advantages of mutual funds is that they can offer diversification in a single fund that otherwise would require an investor purchasing many individual securities, given that most mutual funds hold a great variety of securities. Mutual funds are managed by investment professionals who are experienced in portfolio management. The Mutual Fund Dealers Association (MFDA) has oversight of mutual funds sold in Canada, which presents an additional safeguard as compared to investing in individual securities. This makes mutual funds an investment instrument of choice for many individual investors.

At the same time, investment in mutual funds has associated costs which are charged by the fund and which reduce the fund’s overall return: distribution charges, management fees, transaction commissions and other fund expenses need to be covered by the returns generated by the fund. These fees and costs constitute a fund’s expense ratio. All funds have expense ratios calculated according to a set standard for all funds, allowing investors to compare expense ratios for different funds.

Generally mutual funds offer good investment opportunities through their diversification as well as providing opportunities for investors to access markets that may be difficult or costly to do on one’s own. In 2013, many international stock markets grew significantly. In Canadian dollar terms, the S&P 500 index grew by 41.5%, the MSCI World index rose by 35.9%, the MSCI Europe index grew 34.4% and the MSCI Pacific index rose 26.4%. Many mutual funds available to Canadian investors participated in this growth during 2013.

In the table we present the average returns for different fund categories in 2013, and their average annual returns for the five and ten year periods (2009-2013 and 2004-2013). In many cases last year’s performance was above average for the past five and ten year periods.

The best performing fund categories in 2013 were those focused on the U.S., Europe, and other global markets. However, many Canadian focused fund categories outperformed the S&P/TSX Composite index, which returned 9.6% in 2013.

Michael Zienchuk, MBA, CIM

Investment Advisor, Credential Securities Inc.

Manager, Wealth Strategies Group

Ukrainian Credit Union Limited

416-763-5575 x204

Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds and other securities are not insured nor guaranteed, their values change frequently, and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.