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Comparing PTRs: a case study

February 10, 2014 by Editor, InvestingForMe

As we have discussed previously, the Portfolio Turnover Ratio (PTR) for any given mutual or exchange-traded fund is a quick and easy tool to use when you’re trying to figure out which is the better investment for your savings. A fund’s PTR gives you a way to judge how much activity and risk the professional money managers are taking on to generate their investment returns.


Case study of two similar Canadian mutual funds

Let’s compare the PTRs for two similar, long established and popular mutual funds – the TD Canadian Equity Fund and the RBC Canadian Equity Fund.

Their stated investment strategies

The ever-popular TD Canadian Equity Fund is a big, big fund with $2.6 billion of Canadian savings invested in it. The fund has been around since November 2000, so it’s well established with a huge following.

Here is their stated investment objective:

The fundamental investment objective is to achieve long-term capital appreciation through investments in high-quality equity securities issued principally by Canadian corporations judged to offer high growth potential.

Sounds nice and safe, doesn’t it? It will invest your savings for the long-term, in high-quality Canadian corporations offering high growth potential. Seems like a nice fit for the average conservative Canadian investor.

Now let’s look at the RBC Canadian Equity’s stated investment objective:

To provide long-term capital growth by investing primarily in equity securities of major Canadian companies in order to provide broad exposure to economic growth opportunities in Canada.

Sounds kind of similar, doesn’t it? Both mutual funds have the same investment objective – long-term capital appreciation/growth through investments in high-quality/major Canadian companies. And they both describe their fund’s risk profiles as being Medium.

Their listed annual PTRs

So, let’s look and see what each fund’s PTR can tell us about how the fund managers handle investors’ savings. Look at the following annual PTRs for each fund from 2008 to 2012 as listed in the fund’s most recent annual reports:

Portfolio Turnover Ratios:
TD Canadian Equity230.04%299.16%271.04%180.80%428.60%
RBC Canadian Equity46.0%58.58%65.52%82.78%64.28%

PTRs vs. stated investment objectives

Wow, eh? As you can clearly see from the PTRs listed above, and despite the same investment objectives and risk profiles, each fund’s manager has a completely different trading strategy! The PTRs for TD points to a serious disconnect between their managers’ actual trading strategy and their fund’s stated investment objective and risk profile, whereas the PTRs for the RBC managers fits aptly with their stated investment objective and risk profile.

OK, so maybe you bought the TD fund in 2008 and still hold it today thinking that you were staying true to your conservative buy and hold investment strategy. But unfortunately someone forgot to tell the fund’s investment managers at TD what kind of investor you are because, unbeknownst to you, they bought and sold every investment in the fund more than 14 times! Yes, that’s right! On average, they’ve traded your savings over and over again 2.82 times every year since 2008, which appears to be in contrast to the fund’s stated investment objective and risk profile!

Bottom line: your investments’ profile should match your investing style

I know, I know. Some of you may want to argue with me that your investment in the TD fund did fine in terms of your over-all rate of returns, and for some investors that’s all that matters – how much did I make? Some investors don’t care about the risks they have to take to get results, and in good markets even risky investments go up in value. But ignoring an investment’s risks can be dangerous when markets are not so good. These particular mutual funds are a good case in point. Look at the difference in losses between these two funds in the 2009 downturn in market: the TD Canadian Equity fund lost 46% in the 12 months ending February 2009 compared to a 23% decline for RBC Canadian Equity Fund. So, what we can learn from this particular case study is that when you take the time to study a fund’s PTR to make more informed investment choices, taking into account good and bad market cycles, you’ll come out the real winner.

Remember: Choosing an investment on the basis of an investment’s past performance numbers alone is not a good idea, despite how popular an idea this is! Unfortunately whenever investors search for a new investment, one of the first things they look for is the fund’s past performance. After all, no one wants to buy a loser, right? Looking at the past performance is quick and easy. But simply looking at a single number can be misleading and it can lure us into making poor investment choices. Why?

Well, because the fund’s past performance doesn’t tell us anything about its risks! You also need to assess the amount of risk each fund’s manager took to get those past returns. For example, a manager buying and selling penny stocks to generate a 50% investment return is taking much greater risks than a manager generating 50% by buying and holding a handful of large, dividend paying stocks. So simply looking at the past performance number by itself is misleading as it ignores the risks the one manager had to take in achieving that past performance. But by looking at the fund’s PTR, however, you have a quick and easy tool at your fingertips to assess a fund’s risks and help you decide if that fund is right for you. In other words, an investment’s PTR is a quick and easy way for you to police the trading of a fund’s managers and to ensure that the investment is a good match for your savings.

Next time we’ll explore investment risk profiles and specifically assessing an investment’s risk-adjusted returns.


(This article published by Troy Media)



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