And the best performing equity fund for 2020 is . . .

Question: With the stock market being pounded by the pandemic last year, I am curious as to which equity fund was the best performing or least affected in 2020. Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook

Answer: As a matter of policy, at Personal Finance Advisers, we do not publicly name the funds in our equity fund performance ranking. We do not look at just one year’s performance, equities being the volatile investments outlet that they are. We look at three factors: 1) long-term performance of at least five years (exclusive of entry and exit fees); 2) risk-adjusted returns and 3) performance relative to the PSEi Total Return Index (TRI) as the benchmark that, like equity funds, reinvests dividends.

Since the PSEi TRI was recomputed only as far back as 2007, we use that year as our starting year for measuring portfolio performance and apply three basic periods, all of which end in 2020. These periods are the 13-, 10- and five-year periods.

To measure risk-adjusted returns, we use the Sharpe and Treynor ratios as well as Jensen’s alpha. For index tracker funds, we use index tracking error.

Finally, we had to restrict our analysis to two of the three peso-denominated pooled funds that had readily available data: mutual funds (MFs) and unit investment trust funds (UITFs).

For the 13-year period, 20 pooled funds had available data. The ranking of funds did not change from 2007 to 2019. Two UITFs outperformed the PSEi TRI’s return of 8.07 percent a year for the period. When it came to risk-adjusted returns, the top performing fund, a UITF, was ahead on all metrics. The number two and three ranked funds were both MFs and merely switched places depending on the risk-adjusted return measure used. The two index tracker funds in the list, both of which were MFs, were ranked among the top eight when it came to Sharpe and Treynor ratios, with tracking errors ranging from 3.2 to 4.1 percent.

For the 10-year period, 24 pooled funds had available data. This time around, none of the pooled funds outperformed the PSEi TRI’s 7.66 percent a year return for the period. In terms of Sharpe and Treynor ratios, the top three performing pooled funds were all MFs. It was only with Jensen’s alpha that the No. 3 ranked MF was squeezed out by a UITF, which had otherwise ranked fourth under the two other risk-adjusted return metrics. Interestingly, the top two performing funds by risk-adjusted returns were also index tracker MFs with tracking errors ranging from 2-2.5 percent (versus the PSEi TRI).

For the 5-year period, 50 pooled funds had available data. Just like with the 10-year period, none of the pooled funds beat the PSEi TRI’s performance, this time of 2.25 percent a year. In terms of Sharpe and Treynor ratios, the top performer was an MF while the second and third ranked were UITFs. Of the top five pooled funds by Sharpe and Treynor ratio, all but the top performer were index tracker UITFs with tracking errors of 0.3-1.4 percent. When it came to Jensen’s alpha, the said MF was knocked down to third place while the top two were UITFs, which were ranked 9th and 10th under the two other risk-adjusted measures.

Generally speaking, no pooled fund remained best performing across the three periods under review. MFs and UITFs would also switch places in terms of risk-adjusted return ranking in the three periods. In addition, while index tracker funds are the “lazy” way to investing in equities, their tracking errors, at least for those with available data from 2007, grew over time (i.e. from under 1 percent to as high as 4 percent). Finally, funds with high returns are not necessarily the most efficient when it comes to returns generated versus risks taken.

So, what is the conclusion? Do not focus on the investment. Focus on your long-term financial goal and try to determine what compounded annual return you need to earn given what you can set aside now and periodically. Temper that return with the risk you are willing to take by doing simulations on the cost of your future goal, the time you want to invest, and the amount with which you can invest. Then match your final return and risk preference with the risk-return profiles of available investment outlets. You do not need to chase after the best performing fund.

Be wise in investing. Stay safe and healthy in living. INQ

Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Become a Yaman Coach. For details, email [email protected]. To learn more about personal financial planning, attend the 87th RFP Program this January 2021. To inquire, email [email protected] or text at 0917-.6248110