Despite recent weakness, equities remain an essential component of any retirement savings plan. This is even truer lately, with real interest rates running close to zero. Mutual funds continue to be one of the best ways for individual investors to get access to those markets. Two prominent books explain how.
Gordon Pape's 2002 Buyer's Guide to Mutual
According to Pape, mutual funds bring individual investors several advantages over stock picking. Among them: the ability to get professional asset management at a reasonable price, effective portfolio diversification and a wide range of investment options.
Pape's tome, now in its 12th edition is the granddaddy of mutual fund buyer's guides. Over the years it has grown in size and weight as an increasing variety of offerings emerged, and listing them has become a chore.
For the 2002 edition, many also-rans have been dropped. Only top performers and promising newcomers are now included. Consequently the number of funds reviewed has shrunk from 1,200 in last years edition, to a more manageable 700.
The buyer's guide is particularly helpful to those who have never invested in mutual funds before. However, despite Pape's insistence on the importance of analyzing trend-lines in assessing fund performance, his book's big defect continues to be the absence of crucial performance statistics, notably, three, five and ten-year returns. A list of each fund's top holdings, as well as stock turnover and tax efficiency assessments would also have been nice.
The Power of Index Funds, Revised Edition
Indexing does not get as much attention here in Canada as it should. That's because investment professionals earn greater fees from actively managed funds, than they do from passive funds, writes Ted Cadsby, president and CEO of CIBC Securities Inc. That means index funds have been a well kept secret here in Canada, despite the impressive results they deliver.
For one, index funds consistently and handily beat professional money managers.
According to Cadsby's calculations in fifteen of sixteen years between 1983 and 1999, less than half of U.S. equity fund managers were able to beat the S&P 500. The results become even more drastic over time. Between 1987 and 1997, the S&P outperformed U.S. equity funds by an average of 4.4 per cent a year. Each year.
And those calculations include a one percent deduction for the expenses of running an index fund. Canadian investment professionals have trouble beating the TSE 300 as well, despite the fact that mutual funds can hold up to 30% of their investments in relatively higher performing U.S. and foreign securities.
Index funds have several advantages. The expenses of running these funds are lower, since mangers don't have to do any research. Since they only have to sell if there is a change in the index components, trading costs are lower and tax efficiency is higher.
So its not surprising that the amount of money invested in North American index funds is growing by leaps and bounds, and in 1997 encompassed 20% of total net mutual fund sales in Canada and 50% in the U.S.
Cadsby's book is a good introduction to the subject, and lists recommendations including (big surprise), CIBC funds, which he ranks first.
Peter Diekmeyer is a Montreal-based business writer. He can be reached at firstname.lastname@example.org
|© 2001 Peter Diekmeyer Communications Inc.|