The investment lessons of one very telling Tangerine chart. Canadian mutual funds 101.

OK, I know the suspense is killing you so let’s get right to that chart that offers so many universal investment lessons. Here’s the performance chart for the 5 Tangerine Portfolios.

As you may know I was an advisor and Trainer at Tangerine Investments so I spent a lot of time looking at these return charts, and I spent a lot of time using the charts as a teaching tool. Clients are more than interested in ‘how much can I expect to make’. Or they simply want the investment with the ‘best’ returns. All wonderful teaching opportunities. And while Tangerine Investments is certainly one of the Canadian Robo Advisors, the portfolios are mutual funds. They can offer many lessons in the mutual fund landscape, and that is certainly where and how most Canadians hold their investments.

First off we have to pay attention to the time horizon for the investments. Tucked up under the word Performance in the top left we see the time period is as of September 30, 2018. If we are comparing one investment against another we have to make sure that the time horizon is the same. Different time periods can distort the comparison. On the Tangerine Investment page, and below that chart, you will also read the different start dates for the portfolios. The inception (start date) of the 3 Balanced Portfolios that includes the Balanced Income, Balanced and Balanced Growth offerings is January of 2008, the start date for the Equity Growth Portfolio was November of 2011, and the start date of the Dividend Portfolio was November of 2016.

How to read those performance numbers.

My experience at Tangerine taught me that many Canadians who have very little interest in investments and numbers (that’s most everybody) would need a little help in reading this performance chart. We’ll use YTD as an example. YTD is an acronym for Year To Date, that means this current calendar year. Given that that performance chart is as of September 2018 (end of September 2018) the YTD period will be January of 2018 to end of September 2018, a 9 month period.

To make a 1-Year period (12 months) that would take us back to October 1 of 2017 to end of September 2018. Etc. etc.

Inception refers to the start date of each portfolio.

If you move below the performance chart on that page you’ll see this, the list of the NAV for each portfolio. NAV is the Net Asset Value. Quite simply that means the price or value of each portfolio for every trading day.

OK, I lied, we’re looking at two charts or tables today.

That price or NAV will take into account the value of the Canadian companies, the US companies, the International companies and the Canadian bonds (in the Balanced Portfolios) as a starting point. The value of the portfolios will also take into account any dividends and bond income that came into the portfolio, and will also take into account the fees owed on a daily basis. The NAV will take into account the exposure to the US currency and International currencies. If the US dollar goes up against a weakening Canadian dollar that will increase the value of the US assets that are in the portfolios.

The management expense ratio (MER) for all 5 Tangerine Portfolios is 1.07% (annual). Of course that is paid not ‘all at once’ when you buy, or at year end. That MER is paid on a daily basis on every day that the fund trades. There can typically be about 252 trading days in a year. That 1.07% annual fee will be spread out over 252 days. Trading expenses, known as the Trading Expense Ratio (TER) for the portfolio manager will also be factored into the price each day. For example the trading costs for the Balanced Portfolio in 2017 was just .01%. This is another advantage of a fund that uses passive Index Investing Strategy. The managers of the Tangerine Portfolios are not getting ‘too busy’ with a lot of buying and selling and switching of assets. They are passively attempting to replicate the market indices. An actively-managed mutual fund will typically be much more active and will have a much higher TER as well as a much higher MER. As Larry Bates reminds us in the wonderful book Beat The Bank, those high fees are wealth destroyers. Pay attention to all fees, you’ll find the relevant information on the fund fact sheets.

As a comparison, let’s look at the TER and total fees for Investors Group popular Investors Mutual of Canada Fund. We see a very high ongoing management expense ratio, and a trading expense that is .13% compared to .01% (for Tangerine).

Net, net. The price of a portfolio (NAV) takes into account the value of all of the assets minus the fees. And of course, you’ll see that there is one price per day. There is no intra-day price for a mutual fund even though the stocks and bonds are changing in value every second throughout the day.

And now here’s perhaps the trickiest component of mutual fund pricing and that NAV. As mentioned the price includes all of the bond income and dividends that come into the portfolio. A Balanced Portfolio might receive 3% annual dividends from the stocks and 3% income from the bonds. Those monies are arriving on a regular basis and are driving that NAV higher. Those who hold mutual funds will notice that (most) funds pay a distribution that represents the dividend and bond income received throughout the year. You’ll typically see that distribution in late December of each year. So how can that be? That income is already in the portfolio, and you’ve already been rewarded with higher prices. A fund can’t pay you twice. So here’s what happens; on distribution day the price (NAV) is decreased by the amount of the distribution. The distribution is simply a reporting event for taxable accounts. It’s a wash.

The distribution is simply a reflection or reporting of the income that has already arrived in the portfolio in January, February, March, April … and so on. For more on that here’s a great video from Joe Snyder who is a regular contributor to the Tangerine Forward Thinking blog.

When I was training advisors I would distill it down to this, and make them chant …

There is no value created on distribution day.
There is no value created on distribution day. 
There is no value created on distribution day.

Oh look, I just got started and we’re out of time. I’m already over that 1000 word blog threshold. Let’s wrap things up.

It’s important to understand performance and fees and what is going on under the hood of the performance charts and what gets factored into the returns and the daily prices. We should know our investment performance and know how to compare investments. That usually means finding lower fee investments. Unfortunately Canadians pay the highest mutual fund fees in the developed world. And as Larry describes in Beat The Bank, those fees can eat up half of your investment wealth over a 30-35 year investment period. That’s a retirement killer.

There are a few very reasonably-priced Mutual Fund providers that includes Tangerine and Steadyhand and Mawer – you’ll find those names on the Managed Portfolio Solutions page. I am often reminded that I should add Leith Wheeler to the page. A quick look shows the Leith Wheeler Balanced portfolio with identical returns to that of the Tangerine Balanced Portfolio. And of course on that Managed Portfolio page you will also see a list of the leading Canadian Robo Advisors. The other ‘Robos’ will typically allow you to invest in a fee range of .60%-.70%.

I will be back later this week, with much more on the lessons from the performance of the 5 Tangerine Portfolios. And yes, the performance numbers for mutual funds will reflect the returns after the MER and TER are taken into account. These are net returns.

Thanks for reading. If you have any questions send a note to cutthecrapinvesting@gmail.com, or leave a comment.