| Monthly Mutuals Analysis |
Dateline: 3/23/98
After declining from 24 to 19 in number by the end of January, the number of Power Performers increased to 30 by the end of February. The most notable change was an increase in the number of International Funds on the list. Last month there was one. This month four! And as we noted last month, the Euro funds are hot, so not surprisingly, all four International funds are Euros.
This month I want to focus on something I haven't written much about, namely risk and consistency. The usual measure, called "volatility" is awkward and confusing. I'd like to show you two alternatives I found that are more meaningful and understandable.
In the newspaper's monthly listings, risk is listed under the heading of "volatility". To me the concept is almost incomprehensible gibberish. (And I'm a reasonably intelligent human being.) The Vancouver Sun defines it as "the historical variability in a fund's monthly rate of return". The Globe and Mail expands on this by stating that this variation is the "standard deviation". Unless you took statistics in university (as I did) and remembered what you learned (as I didn't), the concept means nothing to most people.
In simple terms, it is a measure of how prone a fund is to extreme fluctuations in price. The Southam papers list volatility as a number from 1 to 10 (at least 10 is the highest I found) with 1 being the most stable and consistent and 10 being the most unstable and inconsistent. Money market funds are all ones and geared (or leveraged) funds, precious metals, some international funds and some small caps have ratings of 6 or higher. The Globe & Mail uses rankings of HI, LO and AV instead of numbers.
But what does this mean? So a fund is stable? So what? Are you going to plunk all your hard earned money into a money market fund earning an average 2.5% a year because it's stable? Are you going to avoid a high flyer like AIC Advantage because it has a ranking of 4? In investing, as in business, it is often the case that the highest returns accrue to those willing to take a risk. High returns are a reward for successful risk taking.
But there is a more serious flaw with the volatility concept. Theoretically, a fund could be consistently risk free and have a high volatility. Suppose there was a fund that never ever lost money, but it fluctuated wildly between months of flat returns and months of double digit returns. This fund would have a high volatility rating. And yet, given its track record, the risk of losing your money would be negligible. The volatility rating would be measuring the risk of flat performance.
How can we make sense of risk and consistency in performance? Fortunately, two organizations have taken a different approach to the issue. One is Fund Monitor Inc., managed by writer and analyst Duff Young. The other is the Fund Counsel, managed by writers Levi Folk and Richard Webb. This month I'll look at the Fund Counsel approach. Next month I'll look at Duff Young's approach.
January marked the inaugural edition of a new magazine from Levi Folk and Richard Webb called Mutual Fund Review. The authors, both trained economists, are well known in the financial community for their Fund Counsel newsletter and their contributions to various publications.
The premiere issue also introduced a new measure of mutual fund consistency called the Fund Counsel Quotient™ or FCQ™.
If you've watched mutual funds over the years, you probably noticed some funds that have explosive years alternating with moderate and poor years. An example is the Cambridge Resource Fund. From 1987-1996 this fund's year by year performance was 33.3, -14.0, 5.5, -22.8, -10.8, -6.2, 159.1, -10.5, -7.6, 91.1. In spite of those whopping big years of 1993 and 1996, its current ten year compounded annual rate of return is a measly 2.4%. But someone checking out the fund tables in June of 1996 could have been completely misled by a five year compounded growth rate of 32.5% and a ten year rate of 14.8%. The fund had all the criteria to make my Power Performers list that month. So clearly, the question of consistency is an important consideration.
What Folk & Webb's FCQ™ does is remove the best year from a fund's last five year compounded return and look at the adjusted four year return. If the adjusted four year rate is similar to the five year rate, then the fund is a consistent performer. Its results are not skewed by one exceptional year in the last five. The FCQ™ is given as a ratio of the two given as a percentage. An FCQ™ of 100 means that the adjusted annual compounded four year rate of return is exactly the same as (100% of) the five year rate. An FCQ™ of 50 tells you that the fund's five year average return is 50% lower without the best year. A negative FCQ™ indicates that the fund actually lost money in the other four years.
Folk and Webb list a complete table of FCQ™s in the magazine (Results for period ending Nov. 30, 1997). The table does not include money market funds as those would be universally consistent but with low returns. Interestingly enough, the table shows that funds with higher FCQ™s generally have higher rates of return. "The real divide," say the authors, "seems to come at 60. The average annual five-year compound return for all funds with an FCQ™ above that figure is 17% - a full three percentage points ahead of the 14% average returned by funds with FCQ™s below 60."
And as the FCQ™s go up, the returns go up. For funds above 70 the average five year return is 18%. For those above 80, it's an impressive 19.6%. Here is a table showing the top fifteen funds as ranked by five year return and by FCQ™ to Nov. 30, 1997.
| Top 15 Five-Year Performers | Top 15 FCQ™s | ||||
| Fund | 5 Yr Return | FCQ™ | Fund | 5 Yr Return | FCQ™ |
| Multiple Opportunities | 38.2 | 41.27 | Cornerstone Global | 13.1 | 94.74 |
| AIC Advantage | 35.5 | 76.82 | Investors Global | 13.5 | 94.18 |
| Bissett Small Cap | 35.2 | 57.66 | Investors European Growth | 15.4 | 93.33 |
| Marathon Equity | 32.7 | 55.40 | Canada Life US & International Equity | 17.0 | 93.12 |
| ABC Fundamental Value | 31.6 | 53.07 | Fidelity European Growth | 20.2 | 91.64 |
| Sceptre Equity Growth | 27.0 | 82.57 | Investors Growth Plus Portfolio | 13.0 | 91.19 |
| BPI American Small Companies | 26.4 | 78.95 | CentrePost Foreign Equity | 16.3 | 90.94 |
| AIC Value | 25.8 | 88.07 | InvesNat European Equity | 15.5 | 90.47 |
| Formula Growth | 25.8 | 88.76 | PH&N Pooled US Pension | 20.7 | 90.39 |
| Navigator Value Retirement | 25.1 | 65.69 | Trimark Select Growth | 16.0 | 90.33 |
| ABC Fully Managed | 24.0 | 71.03 | Vision Europe | 16.1 | 90.25 |
| Industrial Dividend Growth | 23.9 | 67.90 | Investors N.A. Growth | 14.3 | 90.17 |
| PH&N Dividend Income | 22.3 | 84.95 | Beutel Goodman Private Balanced Fund | 15.4 | 90.11 |
| Mawer New Canada | 22.8 | 61.21 | Trimark Fund | 18.5 | 90.00 |
| Spectrum United Canadian Growth | 22.9 | 74.86 | PH&N US Equity | 19.2 | 89.52 |
As can be seen from the table, neither performance nor consistency by themselves are a key to good fund picking. In their article, Folk and Webb conclude that the best way to pick a good consistent fund is to pick the one with both a good rate of return and a high FCQ™. For a complete table of FCQ™s, write to:
Mutual Fund Review,
35A Beverley Street,
Toronto, Ontario
M5T 1X8
Subscription to the quarterly magazine is $14.00 a year. But I'm sure they'll send you the first issue as a sample on request. Or go to their website for the current table (I am not sure how current it is. Their figures don't jibe with mine).
Note: Fund Counsel Quotient and FCQ are registered trademarks of The Fund Counsel, Levi Folk & Richard Webb.
Marco's Power Performers to Feb. 28, 1998
Top 25 Three Month Performers to Feb. 28, 1998
Funds Performing Better Than 15% Annual Compounded Rate Over 15 Years
Funds Performing Better Than 15% Annual Compounded Rate Over 10 Years
Marco's Power Performers Index Page
Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions.
American Readers: Looking for a broker who can sell you Canadian stocks? One of my brokers is licensed to sell securities to Americans in 26 states. She works for Canaccord Capital which is an excellent company with a superb research department. They are particularly knowledgeable on resource issues. Send me a note if you want to get in touch with her.
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