Top Funds, 1996

Marcia Sweet, formerly head of the Douglas Library’s
Information/Reference Unit at Queen’s University, is currently an
Ottawa-based information consultant and freelance editor.

These informative guides, written by two enthusiastic but uncritical
authors, explain how mutual funds work, outline the advantages and
disadvantages of each type of fund, and provide a cursory but useful
look at other kinds of investments.

The authors claim that most methods of evaluating mutual funds are
inadequate and even misleading. Since so many mutual funds are newly
established, potential investors must sort through whatever information
is available in order to identify the best ones. In these guides, the
authors use a “better” method to identify and rate funds. The
factors of their analyses include the consistency of the fund’s
performance over a period of years; risk involved (expressed by the
number of times GICs performed better than the fund); the number of
times the fund lost money (e.g., 28 percent of its years); and the worst
year’s rate of return.

The authors stress that an investor should choose a fund that is
compatible with his or her risk tolerance, and then should balance this
investment by investing in another similar fund. The authors also
describe the long-term effect of management fees, and provide useful
advice on choosing a strategy for planning a successful portfolio.

Regrettably, there is no discussion of the possible downside of
investing in equity mutual funds. For instance, the authors claim that
GICs do not offer a higher return to compensate for their lack of
liquidity and lack of “pricing”; yet the authors’ own research
shows that during the lifetime of the 89 funds listed in Top Funds 1996
(about 80 in Top Funds 1995), GICs outperformed mutual funds about half
of the time. Other recent research shows that mutual funds and GICs
performed equally well over a 20-year period. For most people, mutual
funds provide the only way to invest outside of conservative vehicles;
they should know that if there is a “correction” in the equity
markets, as happened in 1987, it may have a dramatic impact on the value
of their mutual funds.