Insight February 2003 Monthly Update

“Everyone in the mutual funds industry knows that performance drives both fund sales and redemptions. Or does it? This month’s issue of Insight examines this axiom from several vantage points. Basically, when we compared fund performance with sales activity, we found that solid investment returns certainly help, but may not be as important as Fundlanders tend to think. Fund wraps helped launch one of the industry’s current over-arching trends: the shift from stand-alone product to packaged solutions. Clearly, they are working as a sales vehicle. But is that because of, or in spite of, their performance as an investment vehicle? The four charts that comprise Figures 1a and 1b suggest that these programs have been generally short on performance. But they are long on promise and continue to sell. Figure 1a charts average calendar year returns for stand-alone balanced funds against average returns for wraps with balanced mandates. The top chart—which deals with Canadian balanced mandates— shows average returns for 118 Canadian balanced wrap portfolios. We see that they beat stand-alone funds in just two of the five years, and that the average stand-alone fund’s victory margin was generally much greater than that of the average wrap. Funds posted a five-year compound average annual return of 2.7%, while wraps averaged 2.1%. At first glance, the bottom chart—which covers global mandates— portrays a somewhat better performance for the 122 portfolios we averaged. Stand-alone funds won handsomely in 1998-99 when the bull market was still alive, but wraps moved to the fore as the investment climate deteriorated. Wraps won in three of the five years, though not in terms of compound average annual return: 1.3% for funds versus 0.1% for wraps.”