How to read an investment account statement: What’s in it, what’s not, and questions you need to ask

If there’s one very important thing to look for on an investment account statement, it’s performance. But not only that. Other factors such as your investment strategy, portfolio composition, the benchmark index, ranking, fees, as well as the investment’s volatility, are all important things to consider to ensure that your investments are in line with your investment goals.

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Let’s begin with performance.

This is usually presented in two main ways. The most common is to express a % return on a given calendar year (for example, in 2020 the fund had a performance of 5.5%, in 2019 6.3%, etc.) and over the current year (the famous year-to-date (YTD)). We can also find so-called annualized returns over a period of 10 years, 5 years 3 years, or less. An annualized performance reports cumulative performance over a period of time. It enables you to immediately compare different funds. Thus, an annualized performance of 6% over 10 years means that the investment will have yielded an equivalent of 6% per year over 10 years. Of course, annualized performance almost never corresponds to the reality experienced each year, but it is a very useful measure to instantly compare one fund’s performance over another, over an identical period of time.

For more “visual” individuals, performance can be illustrated by a graphic representation of the fund’s price (net asset value) and/or the growth of an amount (usually $10,000 CAD), thus enabling you to identify the growth more quickly.

While the fund’s performance is important, it’s not enough to determine YOUR performance. In fact, unless you had invested in exactly the same reference period, your investment’s performance will be different.

Obviously, if you had invested in X fund as of December 1 of 2020, your investment’s performance will not be the same as the fund’s performance over the entire year 2020.

Therefore, your investment fund statement should indicate your personal rate of return. It will take into account your contributions and your withdrawals as well as the dates they were processed. This dollar-weighted rate of return will therefore be your investment’s “real” performance.

Let’s continue with the performance.
Investment fund management is a business. There are hundreds of thousands of investment funds around the world. How do you ensure that the funds in your portfolio are of good quality?
There are rankings that compare the performance quality against the risk taken by the manager (performance of 7% with a risk of 10% is much better than a performance of 15% with a risk of 45%). Without elaborating on this essential risk-return relationship, some investment fund promoters allow you to compare their funds against other funds in the same category. We will now talk about quartile ranking.

Some fund sheets contain information about the “quartile”. It’s simple to read. A fund in the 1st quartile is one that is in the top 25% of its class. A fund in the 4th (and last) quartile isn’t good at all. The longer the reporting period, the more relevant the quartile. A fund in the 1st quartile over a one-month period will not, on the face of it, be a relevant indication for a medium-term investment horizon. Periods of three years or more are generally preferred.

Some fund reports will also indicate the total number of funds in the category to make this quartile more relevant. A 1st-quartile fund in a market of 2500 funds will be more attractive to an investor than a 1st quartile fund in a market of 100 funds.

Performance is important of course, but a performance reflecting a level of risk is crucial to ensure that the investments are chosen (what can be called management policy) correspond precisely to your investment goals. It will therefore be important to ensure that the investment report clearly indicates the investment objective and that it is in line with your wishes.

In addition to the investment objective, a mention of the category should be included on the investment statement. Is it a fund or a bond fund? An equity fund or an asset allocation fund? Exchange-traded funds? Hedge funds? Private funds? Etc.

Management fees are also a very important component of performance. These represent close to 2% on average. That is a huge impact.

To illustrate this point, let’s imagine an investment of 6% over 10 years. If you invest $10,000 CAD, after 10 years you’ll have $17,908.47 CAD. If the management fee is 1.8% per annum, then your net return will be 4.2% on an annualized basis, and after 10 years you’ll have $15,089.58 CAD.

Management fees are the fund manager’s compensation. These will vary, either higher or lower, depending on the complexity of management. There are also performance fees for certain types of funds (mainly hedge funds).

You must add membership fees to these management fees (which will pay a seller), exit fees (decreasing over time), but also all costs related to the management of the fund, taxes. Here we are talking about a management expense ratio (MER) (total expense ratio) depending on the jurisdiction.

It’s therefore very important that a clear mention of the fees levied be made. Often the fees are shown in dollars. It is important that they are indicated as a % of the number of assets, which is a more objective assessment than a face value.

This is also true for performance. A performance of $100,000 CAD is a lot on $200,000 CAD invested (50% performance), but not much on $10,000,000 CAD (1%).

It’s also very important to have a portfolio analysis in order to ensure that your investments reflect your objective(s).

This, even if it is a summary, will enable you to see your asset allocation (liquidity, fixed income, equities) and thus see that this corresponds to your investment goals. Ideally, there will also be a geographical distribution by asset type. Some will even go so far as to provide information about management styles (value, growth, reasonably-priced growth), type of action (small, medium or large capitalization), as well as metrics (yield, PE, etc.)

For a bond investment statement, it will also be necessary to inform the credit qualities, the kind of bonds (fixed, variable, convertible, CMS, etc.), derations (an indication of the risk of the rate associated with bond holding), nominal and actuarial returns, etc.

It might also be important to know the size of the fund and its creation date, but also if necessary the benchmark indexes (i.e. it will be the basis of comparison of the fund). We are not going to compare, for example, the performance of a bond fund with that of an equity fund. Do not compare the performance of a North American small and medium-cap fund with a large European capitalization fund.

However, you can try to make such a comparison through the Sharpe or Sortino ratio on a fund sheet or in an investment report. This is an indication of performance in relation to a level of risk. In other words, is the performance of my fund (or portfolio) more than proportional to the risk taken? Unfortunately, these types of ratios are rarely available for a mutual fund and/or on an investment statement. However, they can be easily calculated if you have your fund price history (or the value of your investments).

In summary, an investment statement should contain the following information:

• The investment goal
• Analysis of the return (in dollars and in return over several periods) and of course the price of the funds (average acquisition price, current price)
• The management expense ratio
• Asset allocation and/or fund category
• The benchmark index(es)

One could also pay attention to the

• Quartile ranking
• Volatility or the standard deviation (often replaced by a mention of the level of risk)
• The size of the fund(s)
• Their creation date

The list could be longer, but the key is to always invest in things you understand. Don’t hesitate to ask questions, and above all, ensure that your fund manager answers them objectively and without using too much financial jargon (although it is sometimes difficult, as this article demonstrates ).