Equity markets are volatile by nature and returns can vary significantly year from year. This can been seen quite readily by looking at the returns of equity mutual funds over time. Listed below are Canadian equity mutual funds, and on the following page foreign equity mutual funds, that we support. We have shown simple annual returns for the past 5 years and compound annual returns for the past 3, 5 and 10 years as of Dec. 31st, 2004. Simple annual returns are just that: the return for the fund for that particular year. Compound annual returns show the geometric average annual return over a number of years, assuming that any returns over a specified time period were reinvested in more units of the fund. Bold emphasis indicates that the fund performed above average for its category during that time period, as compared to its peer group. It is a separate matter to compare the fund performance to a relevant index, which is the benchmark active mutual fund managers attempt to outperform.

CANADIAN EQUITY MUTUAL FUNDS

We have included similar results for Money Market and Canadian bond fund investments as a base-line to compare the returns of different risk-profiles.

Look at Ivy Canadian, for example, in the Canadian equity group. It has been a superior (bold) performer for the 3 and 5 year compound periods; however, you also see that the simple returns were inferior for two of the five years in the five year compounding period. The relatively superior performance for the other three years was sufficient to produce 5-year compound success.

INTERNATIONAL EQUITY MUTUAL FUNDS

In the foreign group, Fidelity Int’l produced superior simple returns in 2 of the last 3 years and 3 of the last 5 years, but failed to produce superior compound results in both the 3 and 5 year periods.

Notice that the majority of funds shown achieved superior performance across all three compound periods, but few achieved superior performance in every single simple period. Such is the nature of mutual fund investing and stock-picking…. the experts call this “regression towards the mean (average)”. The tricky lesson is not to “punish” and bail out of your fund that falls off the pack in a particular year or two because the investment climate of the day favours a different investment style, eg “growth” vs “value”.

Exchange-Traded Funds (ETFs) continue to develop as an alternative to actively-managed mutual funds. ETFs are passively managed funds that track indices and have significantly lower annual management fees compared to mutual funds. Many track broad geographic indices (like the US, Europe, Japan and Emerging Markets) while others track industry sectors (like technology, health or banking,) or small, medium or large companies.

We are continuing to assess individual mutual fund performance against the relevant ETF. In the past year, some have been dropped from our list and others have been added. Our portfolios continue to evolve to a blend of direct stock holdings, rigidly-tested mutual funds and ETFs. We are including foreign ETFs along with mutual funds in our international geographic analysis of portfolios. Unlike mutual funds, we are better able to break down the dollar value of money invested in broad-index ETFs into the various industrial sectors and include them in your sector analysis along with direct sector holdings.

This provides us with more insight into the risk exposure of portfolios to the various industrial sectors and allows us to effectively adjust portfolio weightings in the sectors. Once again, as the Head of GM’s pension fund says, portfolio management is mostly about “engineering”.