A Study of the Relative Performance of Investment Companies in Canada

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A Study Of The Relative Performance Of Investment Companies In Canada

Canadian investors basically have the choice of either managing their own portfolios or delegating this function to some party retained for this purpose. Included among the options of the latter are investment companies--companies that manage an aggregation of investors' funds, thereby allowing individuals to share in the profits and expenses of a sizable investment pool and to benefit from the expertise of professional investment managers. Purchasing shares in any investment company, however, is sensible only if this mode of investing can be expected to achieve a greater return than alternative delegated portfolio management options. And even then, the individual must, at a minimum, decide the specific investment company in which he or she will invest.

This study investigates the performance of nineteen Canadian investment companies of three different types. The companies are examined on the basis of portfolio riskiness, returns, and performance (i.e., risk-adjusted returns).

There are two categories into which investment companies are usually classified: (1) fixed or unit trusts and (2) management companies.

FIXED OR UNIT TRUSTS

These investment companies are distinguished by the fact that the portfolio of securities is selected at the time it is organized, and this portfolio is not subsequently changed.

MANAGEMENT COMPANIES

The type of investment company that dominates the investment fund industry in both Canada and the United States is the management company that employs a separate company to administer and manage the portfolio of securities. For these duties the management company is paid a fee, which is usually stated in terms of a percentage of the value of the fund's assets under administration. For the purposes of this paper, management companies will be the only classification examined.

Within the management-type investment companies, there exists two different classifications: closed-end companies and open-end companies. Closed-end companies, similar to traditional operating companies, do not continuously offer their own securities for sale to the public, nor do they repurchase their shares on demand by shareholders. The only way for an investor to purchase or sell shares is through a transaction on a secondary market based on the current market price that is determined by supply and demand. Closed-end investment funds have existed on the international investment scene since 1822, when King William I of the Netherlands launched the first one, and they have grown in popularity, especially in the United Kingdom, ever since. Open-end investment companies, which are synonymous with mutual funds, differ from closed-end companies because shares are continually offered for sale and continuously redeemed by the company on demand by shareholders. The redemption or sale price used to value the stock is the net asset value per share. Shares are purchased (or sold) directly from the fund itself or through a broker with or without a "load charge." This load charge is similar to a brokerage commission charged on the purchase of shares on a secondary market but is usually shared between the broker and the fund itself.

OBJECTIVE AND PURPOSE OF STUDY

Investment company past performance requires examination in order to draw conclusions about the value that these investment vehicles have provided to Canadian investors in the past and the implications that these conclusions reveal for future investment decisions.

The purpose of this study is to examine the relative past performance of investment companies in Canada from the viewpoint of the individual investor. The objective is to determine which management-type investment company group would have provided superior relative performance to the investor over various time periods and to examine the implications that these results have for future investment decisions. …