Question: I have been a holder of the AGF Canadian Large Cap Dividend Fund since Aug 2007. My purchase price was $11.56. It closed on May 31 at $8.70. This represents a loss of about 25% to me. Can you please explain how this fund manages to advertise that it’s losses over 5 years is only -1.7%? How can my 25% loss be explained as a -1.7% average annual compound return?
Answer: First, let me say that I understand your frustration. Mutual fund return numbers, particularly those used in marketing campaigns can be very confusing in the way that they are presented.
In this situation, there are a number of issues that are making things more complicated. The first is that the marketing piece that you are referencing is quoting the “compound annual growth rate” (CAGR), which shows how much you would have gained or lost each year, on average, during the time period quoted. For example, in this case, had you held the fund between April 30, 2007, and April 30, 2012, you would have lost, on average, 1.72% per year. In your situation, you are looking at your loss on an absolute level, or “simple return” as it is known. In doing some math, we determine that the CAGR of -1.72% works out to a simple return of -8.30%.
The next complicating factor is the time frame being considered. The marketing piece is referencing the five year period between April 2007 and April 2012. However, you are looking at the period between August 2007 and May 2012. These are very different start and end dates. Because of this, the returns that you have experienced are much different. In your case, as of May 31, 2012, you have realized a simple return of -24.74%, which translates into a CAGR of -5.80%.
Which is right? Both are correct. Your question illustrates the complexity involved with the return numbers that are often used in promoting mutual funds. Investors need to pay attention to the start and end dates of the period for which the fund is highlighting its returns. The return numbers that they will use will be accurate, but only if you held the funds for the time period that is referenced in the advertisement. And as the disclaimers say, past performance may not be repeated.