It’s that time in the market cycle when we’re all vulnerable to hearing how great someone else has done with their investments. Invariably, this kind of chatter leads back to comparisons with the mutual funds owned by the speaker or the listener. “I’ve had 30% returns from my own investments, but my funds have done nothing. A house down the street just sold for twice what we paid for ours … I wish my mutual funds were doing that well.”

As we start up Steadyhand, this is a good news / bad news story. It shows that there are people out there who aren’t satisfied with their current mutual fund holdings (Yeh!), but … it also shows that there is a strong negative bias against funds.

My comments below are aimed at the general perception, not how Steadyhand will do it better.

First, I will admit to being somewhat baffled by these types of comments. Even in an industry where fees are generally too high, there are a ton of funds that have performed really well over the last few years.

  • In general, Canadian equity funds have had a very good run. Data from Globefund shows that this category’s median return for three years ending January 31st was 15.6% per annum ($10,000 invested three years ago is now worth $15,450). Even over the last five years (which included 2002 and 2003 … ugh!), the median fund had a return of 11.3% per year.
  • Income trust funds had a tough year in 2006, but have provided excellent returns over the last three years (10.7% per annum) and five years (15.6%).
  • International stocks came roaring back in 2006. The median fund in this Globefund category was up 20.5% last year. And despite being a laggard previously, the three year return was 12.1% per annum.

I’m not trying to cherry pick funds or categories. My point is that markets have been good and mutual fund returns have been good too. (Note: By definition, half of the funds in the samples referred to above did not achieve a median return, but the other half did better.)

I think we are all vulnerable to sloppiness when we’re making performance comparisons. We have to be careful we’re not comparing apples (our ‘fun’ money) and oranges (our ‘must be there when we retire’ money). In the latter case, a typical portfolio will be well diversified and own fixed income securities as well as equities.

If we look back over the last few years, Balanced funds have done what they’re supposed to do. Again using data from Globefund, a median Balanced fund has provided 8.2% per year over the last three years. If we include the wipeout years (2002 and 2003), then the annual return for five years was 6.4%. While Canadian and International equities carried the load over the last year, the fixed income securities saved the day during the bear market (will U.S. equities be the next asset classe to pull its weight?).

All the measures we look at right now say that risk taking in the capital markets is off the charts (see my Globe and Mail column this Friday), so it’s not surprising the locker room talk is full of great stories. Before you shrink into your locker with embarrassment, make sure you compare the chatter to what you’ve done with your speculative investments, if you have any. Otherwise, you might want to change the topic by asking “How did Stevie and the Suns do last night?”