All mutual funds aren't created equal

Putting money into your RRSP is only the start of an investment program. Do you know where your money is?

By Charles Corvallis

Four years ago a New Westminster, BC, family physician thought he was doing the right thing by his new grandchild. On the baby's first birthday, he opened a Registered Education Savings Plan (RESP) for the child (for more on RESPs, see "Retirement vs your children's education"). To get the ball rolling, he simply called the agent he'd been dealing with for years, asked her to open an account and mailed her a cheque for $4,000.

The idea was that he would add to the fund each year on the child's birthday. Nice plan — but what with one thing and another, he failed to make any further contributions. With the child now in his fifth year and about to start school, the doctor's mind again turned to the lad's education. He called the broker and asked how the plan was doing. She had to look it up, she told him, and would fax the latest quarterly statement to him. When the sheet arrived he had to sit down. His $4,000 investment four-and-a-half years earlier was now worth $3,758.16. The young boy was $241.84 further away from accumulating a college fund than he had been in 2002. The mutual funds into which the education money was put failed to perform, plain and simple. The lesson is a valuable one that they don't teach in most colleges: pay attention when you put your savings into mutual funds.

POPULAR PITFALLS
Mutual funds are by far the most popular place for doctors to put their RRSP investments. Fully 78% of NRM readers have more than half of their sheltered money in mutual funds according to the latest Personal Finance Survey, and a notable 41% have all their investments in the funds.

One of the reasons for this is the popularity of the well-managed funds offered exclusively to physicians and their families through MD Management Ltd's MD Funds Management Inc, part of the Canadian Medical Association group of companies.

Investors in these or any other mutual fund receive quarterly reports. But too many of your colleagues don't even bother to open these documents when they arrive.

There are a few reasons for this. If you're 20 years from retirement, is it really necessary to track every tick up and down? Even if you did keep yourself au courant, what could you do about it? Finding out why a fund is rising or falling is picky, often frustrating work.

There are doubtless more important things in your life but it does make sense to review your holdings at least once a year.

What you discover is often unpleasant, as the West Coast FP found out. The fact is there are hundreds of mutual funds for Canadians to choose from and they're far from created equal. Leaving aside the matter of management fees, front and rear loads, penalties for cashing out early and a host of other wrinkles in the fine print, there's the matter of performance. It's sobering to know, for example, that international funds on average gained only 2.4% a year since 2001. You could have done almost as well with a savings account at the bank down the street.

WHAT'S THE MINIMUM?
That's not to say, of course, that some funds didn't do very well indeed. One called United-International Equity Value Portfolio managed by United Financial Group racked up a wealth-creating 10.4% a year in each of the last five years. The fifth top international equity performer, Acadian Core International Equity Fund, pulled off an average annual return of 8.8%. There is, however, a drawback for those wishing to invest in these funds: a minimum investment is required.

Most physicians could likely meet the ante to get in on the United-International's gravy train, possibly by transferring funds from other investments — the minimum is $25,000. Acadian Core, on the other hand, blatantly caters to the richest of the rich. The entrance fee: $5 million.

You may be under the impression that funds with high minimum investment criterion are few and far between and are confined to the top performers. You'd be right — and you'd be wrong. Fully a quarter of the funds on the Canadian market have minimums. That doesn't guarantee performance, but it does seem to help. Three of the top five performing Canadian equity funds require hefty minimum investments, as do four of the top five US performers. In the more esoteric "alternative strategies" club, all five of the top funds require you to begin with $10,000 or more.

You could be forgiven if you believe that this only confirms that the more money you have, the more money you make. There are, however, happy exceptions. You can get into The CIBC International Small Company Fund by plunking down a paltry $500 and it's returned an average of 9.4% in each of the last five years.

So the next time you receive your statement, give it a read. Likely you're making more than 2.5% and less than 10% a year. If your return is closer to the two than the 10, consider switching to one of the better performers — it might even be worth coming up with the minimum ante.