We know for sure that financial markets can be volatile. They do rise, and they certainly can fall just as fast. After over three decades in the financial services industry, we have learned that these swings are something that we cannot control. However, we have also found that there are certain fundamental criteria that we can control that help reduce risk and improve returns.

This was a turning point for our firm, as we decided to develop a plan to use these fundamental criteria when assessing investment products for our clients. The plan was formulated, and The Best of Class was born in August 2000. There are four fundamental criteria that outline our Best of Class method for choosing quality investment products:

  1. The fund must have a manager that has been in place for four years or more.

  2. The three year standard deviation, a measure of the fund’s volatility, should be 15 to 20% lower than the category average.

  3. The management expense ratio (MER) should be 15% less than the category average.

  4. The five year rate of return should be 20 to 25% higher than the category average.

The reasoning behind each of these four criteria is outlined below:

Manager: We like to see a fund manager running a fund for at least four years. This gives them time to establish both a direction for the fund and a track record of performance. When a new fund manager is introduced to an existing fund, it is not uncommon to see many of the investments change as the new manager tries to increase the rate of return of the fund. The problem is that you have purchased the fund based on the prior manager’s strategies and performance record. The new manager’s strategy may not coincide with the prior managers, which can also mean that the performance of the fund declines as well.

Standard Deviation: The markets have seen some volatility in recent years. Standard deviation is the measurement of the volatility of an investment. We carefully research and select funds that have a lower standard deviation and therefore lower volatility. This doesn’t mean that the funds we choose will not have downward variations, but that these variations will be less extreme than similar investments. A lower standard deviation provides our clients with the comfort that the fund manager is not taking any unnecessary risks with their money.

Management Expense Ratio (MER): The MER is the total percentage cost of the fees that the fund company takes from your fund each year to cover their costs. High MERs can be very detrimental to the return of a fund, reducing the actual rate of return made on the investments. It is still possible to make money with a high MER fund if it has high enough returns, but as a consumer you should always know exactly what your portfolio of funds are costing you. At the end of the day, doesn’t it make more sense to keep that extra percent or two in your pocket instead of the fund company’s?

Rate of Return: Almost every investor wants an above average return on their investment. Our final criteria is to try and identify the mutual funds over a five year period that meet the first three criteria, and also consistently produce better than average returns.

The information contained herein is for Canadian residents only and does not constitute an offer to sell or a solicitation in any jurisdiction in which Manulife Securities or its Advisors are not appropriately licensed or registered or where any Product or Service is not eligible for sale. Details are available on request.

Insurance products and services are offered through McEdwards & Whitwell Financial Planning Inc.

The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc.