Presentation – Understanding Active Share

To make it easier for you to prepare materials for clients, we’ve developed these slide selections on the topic of measuring a money manager’s value. This text outlines some of the benchmark indexes against which performance is measured, and shows how fees and inflation rates factor into returns.

We know you’ll want to customize and add elements specific to your client, so we’re providing it in a Word file to make it easier.

Enjoy, and we hope this offering helps enhance your client meetings.

SLIDE 1

You’ve invested in some actively managed mutual funds. They cost more than index (passive) funds, so you ask yourself the question:

Am I getting my money’s worth?

SLIDE 2

To answer this, you need the right points of comparison.

If you don’t evaluate the funds against the proper benchmarks, it’ll be apples-to-oranges.

SLIDE 3

Example

You buy a Canadian large-cap equity fund that goes up 6% in a given year. You hear on the news that in the same year the Dow Jones was up 8%.

Does this mean your manager underperformed by 2%?

SLIDE 4

No

The Dow Jones is a U.S. equity index, so it’s the wrong point of comparison.

You need to look at what would have happened if you bought Canadian large caps in amounts that match TSX weightings.

SLIDE 5

And, the calculation has to take all fees into account.

SLIDE 6

Say your fund gained 6% and its benchmark went up by 5%. If you’re paying a 2.5% management fee, you did worse than if you’d taken the passive option.

SLIDE 7

Passive investments have fees, too. They’re much less than active fees, but they must be taken into account for the comparison to be accurate.

SLIDE 8

Patience

Some active management strategies take three-to-five years to produce expected returns, so judging performance based on monthly or annual data can be misleading.

Indexes also have good and bad years.

SLIDE 9

Common index benchmarks

SLIDE 10

Canada:

S&P/TSX 60

S&P/TSX Composite Index

S&P/TSX Smallcap

SLIDE 11

U.S.

Dow Jones Industrial Average

S&P 500 Composite

S&P Midcap 400

S&P Smallcap 600

NASDAQ Composite

SLIDE 12

Other:

FTSE 100 (UK)

MSCI EAFE (Europe, Australasia and Far East)

Hang Seng (Hong Kong)

Nikkei 225 (Japan)

MSCI Emerging Markets

SLIDE 13

Some funds target specific sectors and can be measured against benchmarks like these:

Dow Industrials

NASDAQ Telecommunications

NASDAQ Biotechnology

Dow15 Utilities

SLIDE 14

There are also indices for benchmarking certain styles of investing.

Growth and Value are two popular examples.

SLIDE 15

Your fund’s manager may have a mandate to use one of these styles. This may make it appropriate to measure progress against a style index like the Russell 1000 Value Index or the MSCI USA Value Weighted Index.

SLIDE 16

Checklist

When investing in actively managed funds, ask your advisor the following:

·  What’s the benchmark for the fund I’m buying?

·  How much more in fees am I paying compared to the passive option?

·  What’s the appropriate time horizon for checking up on performance?