Benchmarking Funds: One Size May Not Fit All

You’ve probably noticed that your mutual fund account statement shows two sets of figures for average annual total returns: one is adjusted for the maximum sales charge; the other is unadjusted. Which figure should you use to compare the performance of your investment to its benchmark?

First, some background. The Securities and Exchange Commission (SEC) requires mutual funds to show both figures to provide investors with a fair and accurate comparison.

Unadjusted figures

Unadjusted figures show the performance of a fund taking into account changes in share value and assuming all income and capital gain distributions will be reinvested; however, they don’t adjust for sales charges.

Adjusted figures

Adjusted figures use the same calculation as unadjusted figures, but also factor in the effects of the maximum sales charge that can be applied to a certain share class.

Is either comparison right for you?

If you paid a sales charge, looking at unadjusted figures may not be a good comparison. On the other hand, the adjustment for maximum sales charge may not reflect your particular situation. For example, if you own Class A shares with a 5 percent up-front sales charge, the sales charge would have impacted your investment in the year of purchase, but the adjusted figures would show its performance as if you had invested today.

As well, sales charges are sometimes waived or reduced, so you may find that neither adjusted nor unadjusted sales charges reflect your own investment experience.

Personal performance data

You may want to look at your year-end account statement to see if it has personal performance data. Some mutual fund companies provide it, and when available, it will offer the most accurate measure of your investment, taking into account all transactions and any sales charges you paid.

As well, your financial advisor may be able to provide you with personalized return information and help explain it to you.

Is It Time to Increase Your International Equity Allocation?

Foreign stocks had a losing year in 2014, with the MSCI EAFE Index, a wide benchmark of international stock markets, losing 4.90 percent. That’s far worse than the U.S. benchmark S&P 500 Index, which gained 13.69 percent. But that doesn’t mean you should avoid foreign stocks.

First, non-U.S. equities make up almost half of the broad MSCI All Country World Index, and foreign countries have become more prominent contributors to the world’s gross domestic product (GDP). Thus, foreign stocks give investors the chance to broaden their opportunities and their portfolios.

Second, the recent performance of foreign stocks might drive away some investors, but others see it as an opportunity to get a bargain. Different asset classes tend to perform differently at different times, with what’s down going up and vice versa. Indeed, many foreign stocks are cheaper than U.S. stocks based on such common measurements as price-to-earnings ratio and price-to-book value, and they may offer higher dividend yields. While cheaper valuations don’t guarantee higher returns, they may be appealing to certain investors.

Finally, over the long term, international stocks have outperformed U.S. stocks, with the MSCI EAFE Index returning an annual average of 7.67 percent over the past ten years ending December 31, 2014, vs. 4.43 percent for the S&P 500 Index.

Do you think international equities might be right for you? If so, please consult your financial advisor, who’s familiar with your individual financial circumstances and goals and can help you determine the role such investments may play in your overall portfolio.