Family Affairs

When it comes to investing, I’m a big believer in families—mutual fund families, that is. By choosing most or all of your investments from a single company, you can easily shift assets from one fund to another, and you can track your results on a single statement. If you choose your fund family wisely, you can also reduce your stress. While hot mutual funds come and go, a good fund family usually stays good when you look at the average performance of its funds.

The big question, of course, is which fund family to choose. The FundScope Family Ratings depicts the best rated families.  These are the families that shine when rated on four criteria:

1. Cost is important and, yes, cheaper is better. Funds with low fees produce better results over time than funds with expensive fees. Even a half-point difference in management expense ratio (MER) will have a huge effect on your results over the long term. The table compares the average management MER of each family’s funds with the fees charged by similar families (the difference is referred to as Average Cost Differential). A ratio of -1 means the family’s funds are, on average, a percentage point cheaper than the competition’s funds. A ratio of +1 means the family’s funds are a percentage point more expensive.

2. Investor reward shows the percentage of the family’s assets that is invested in funds with above-average performance. A high percentage (50% to 100%) suggests that most investors in the fund family will be satisfied with the performance they’re getting. This is important because a large number of dissatisfied investors could cause a wave of redemptions, which in turn could lead to forced sales of prime investments and even worse performance.

3. Choice is simply the number of investment categories represented by different funds in the family. The more categories—such as Canadian equity, U.S. equity, global bonds—the better.

4. Performance measures the number of funds within the family that have reported above average results in the last three years and the last five years.

 The best rating of any fund family on our list is only four diamonds on a five-diamond scale. This lack of perfection isn’t surprising. To make it into the highest realm, a family would have to possess the lowest MERs in each fund category, it would have to have all of its assets invested in above-average performers, and its selection of funds would have to cover at least 20 investment categories.

How do you choose from the most perfect of an imperfect bunch? Probably the most important single factor for investors to consider is cost. Low-cost fund families, such as Barclays Global Investors Canada (Barclays), Phillips, Hager & North and McLean Budden, dominate the top of the list year after year. The problem with those companies is that active portfolio management is not their strength.  By mandate, Barclays is an index fund provider. As for the other two, their equity funds are generally heavy on index components.  This is probably what allows them to keep costs and portfolio turnover under control.  But the truth is that, the higher the similarity with the index, the lower the probability of beating that index.  Similarity with the index also results in higher risk for most equity funds of those families.

Smaller companies, such as Beutel Goodman, Saxon Funds and Mawer Funds, also deliver their funds at low cost, and they have moved up the list with the recent strong performance of value investing. Here, you should know that, when bull markets rage, those value funds will probably sag.

The other common problem with all those families is that they require minimum investments of $5,000 to $25,000 when you open an account. One family that strikes a reasonable balance between all these factors is Standard Life Mutual Funds. Its funds have either peer-comparable or below average management expense ratios. On the other hand, the majority of its funds has low R-squared factors (indicative of active portfolio management) and below average standard deviations. It is accessible to small investors with as little as $1000 to start.

Other big name funds, like AGF, AIM and Franklin Mackenzie can also be good alternatives for less affluent investors. These families offer a wide variety of actively managed funds, with a variety of investment styles, and you can always quite a few funds that have done reasonably well in each of the major fund categories.  Bank funds are known for being cheap and affordable, with HSBC Investment Funds and Scotia Securities Inc. continuing to lead the bank pack, partly because of their low MERs and the solid track record of their fixed income funds. But most of the families with a composite rating of three diamonds or better are good choices. Pick one and your most important investing decision is made.