Nothing says futility like an investment in an equity fund that lags the returns of five-year guaranteed investment certificates.
The five-year GIC is the default investment of the risk-averse members of our population. Returns are low, but the chances of losing money are as close to zero as you can get without actually using the term risk-free.
Now, what if you take on more risk by investing in equity funds? You'd, of course, expect to do better than a five-year GIC, while being aware of the risk that you could do worse. The longer you invest, it seems logical to say, the better your chances of beating the five-year GIC.
This is what the mutual fund industry would tell you. Long-term investing is the way to go because it allows the stock market's long-term upward trend to more than offset those periodic bad patches like we've seen lately. Every so often, however, the conventional wisdom in investing runs into harsh reality.
One of those times occurred recently when a reader e-mailed to draw attention to the fact that the $3.3-billion Templeton Growth Fund has delivered worse returns over the past 10 years than five-year GICs.
It's true, but why single out Templeton Growth? Almost all mutual funds in the global equity category have 10-year compound average annual returns that are less than what you could have received with a bank GIC, and the same goes for U.S. equity funds as well.
That's at posted five-year rates, mind you. You probably could have done even better with a GIC by asking for a rate bonus. But we digress. At issue is the fact that there are people out there who have done everything the experts advise with mutual funds - hold for the long term and diversify internationally - and been rewarded with returns that are out-and-out rotten.
This is not meant as a repudiation of long-term, buy-and-hold investing, which remains the most sensible approach for a majority of people. But it is a reality check about the level of patience and fortitude required when investing in the stock markets.
If you purchased a five-year GIC 10 years ago at posted rates and then rolled it over into a new one at maturity, you'd have an average return of 3.9 per cent. Just seven of 51 global equity funds managed to beat this return, and just two of 47 U.S. equity funds.
Templeton Growth averaged just 1.45 per cent a year for the 10 years to March 31, but it's far from the worst of its kind. The $1.5-billion Fidelity Global B Fund gained just 0.4 per cent annually, while the $977-million TD Global Select Fund made 0.04 per cent a year for the past decade. In dollar terms, a $1,000 investment made 10 years ago in this fund would have gained - wait for it - $4.10.
It may sound a little unfair to pick on global and U.S. funds because their returns have been ruined less by bad investments or falling stock markets than the rise of the Canadian dollar against its U.S. counterpart and other global currencies. The more our dollar rises, the more it undermines the returns Canadians get from other stock markets.
And yet it's often said that the impact of currency moves on fund returns ends up neutral if you invest for the long term. In fact, the Canadian dollar was a slow but steady loser for the first half of the past 10-year period before beginning its amazing rise. Currency hurt foreign investing returns more than it helped over the past 10 years, but it wasn't a constant drag by any means.
The next 10 years may well turn out a lot better for global funds, especially given the fact that the Canadian dollar is at a high point with seemingly little sustainable room to climb. Or not. Maybe the commodity-fuelled Canadian market will continue to outperform for a while longer. Care to guess the right outcome? Some investors and advisers will get the answer right, but the odds against it are steep. A better approach: Stay invested in the stock markets, stay diversified in global terms and stay tuned. If you look at how global funds have done in the past 30 days, you'll see some very encouraging numbers in some cases.
No question, you should absolutely expect good results over a decade, because 10 years is long term by any definition. Way back in 1998, the Monica Lewinsky scandal was in full swing, Titanic won the Oscar for best picture and America Online acquired Netscape. Talk about ancient history.
And what of those investors who own global equity funds that have been thrashed by virtually risk-free GICs? Let's just say they've had a lesson in how the reality of investing means bad things sometimes happen to investors with the right plan.
GLOBAL FUND FOLLIES
Most mutual funds in the global equity category have delivered returns to investors over the past 10 years that are below what nearly risk-free GICs would have offered. Here's a look at some widely held funds that have both lagged and bested the average 3.9 per cent you would have locked in by investing in a five-year GIC in April 1998 and then rolling it over in 2003.
|Fund||10-yr. annualized return|
|Trimark Select Growth||0.09%|
|AGF International Value||3.03%|
|Mackenzie Ivy Foreign Equity||4.56%|
|Trimark Fund - SC||5.75%|
|Fidelity Global - B||0.38%|
|TD Global Select||0.04%|
|Primerica Aggressive Growth||5.84%|
|Desjardins Global Equity Value||0.20%|
|Mackenzie Cundill Value A||8.20%|
© 2007 The Globe and Mail. All rights reserved.
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