How well have your pension investments performed?

A while back, you chose some mutual funds offered by your pension administrator after having your risk tolerance assessed. Now what do you do? If we only listened to the disparaging remarks about how poorly "everyone's" pension funds performed in the last three years, one might be inclined to decline, just not invest at all. Some employees close to retirement did just that, selling out of all equity and bond funds and reallocating into guaranteed funds. While it may help nocturnal peace, this decision removes most opportunities for asset appreciation. Heard on the street is that pension fund returns, generally, have eased back upward. Were your funds good ones whose long-term performance was just displaced in a bad market, or were what you chose just plain mediocre? How can you independently find out?

First, Use A Mutual Fund checklist. .

In the professional capacity of providing investment advisory services to clients, I have developed a mutual fund rating criteria checklist that is used to assess each mutual fund's investment-worthiness. This week, three more criteria were added to rank fund companies that have implemented safeguards against market timing. See Chart. Fund company management can control this deleterious activity by: limiting the number of trading days per year; using fair value pricing; and charging a hefty redemption fee (two percent is not enough) for those trading in and out. Ironically, hedge funds (some of who have been complicit in mutual fund shareholder exploitation) generally, severely limit their own shareholders from frequent trading.

Mutual fund prospectuses may not always provide this type of information. Or should I say, did not. Today, wanting to appear squeaky clean those that didn't (engage in market timing) are assiduously emphasising their virtuousness. Sceptical? November 25, Bloomberg reported that European regulators are requesting information from many of the same global mutual fund brand names (already in the headlights in the US) that may have shortchanged their customers.

Second, Locate the mutual fund research website.

www.funds-sp.com (http://www.funds-sp.com) is a free global mutual fund research centre. Five years ago, Standard & Poors Mutual Fund Rating Service provided only basic research free to the offshore private investor. Competition is the driver of change, and with competitors such as Bloomberg building its own superb mutual fund rating system, consumer access ultimately benefits. Today, the S&P website is sophisticated and timely, almost on par with US fund research websites.

Click on Choose Country - chose Barbados, for some reason Bermuda is not listed, to take you to Offshore Funds. Click on Fund Universe, then Registered for Sale, then Management Groups, then find the brand name of your funds, then drill onto each individual fund fact sheet. Of course, you will need to know the exact brand names of your funds.

Third, Make Your Comparisons:

Note that the fund I used is for illustrative purposes only.

Peer performance and sector ranking - how well did your fund perform when compared to its peer group? For instance, large cap growth mutual funds (1250 of them) would be grouped together. Your fund might have faired well for one year, ranking 79 / 1250 in the group, or a rating in the top 6% of 25 % quartile. However, look at the performance over three years, on to the bottom; then back 1998 and 1996 high annual total returns.

Performance against benchmark. Each fund is compared to its benchmark, in this case, the S&P 500 index. Sometimes, the fund will have great numbers against other like kind funds, but rank poorly against the benchmark.

Consistency is key, too. You are looking for consistent performance, in good and bad years because this denotes good fund management and no surprises.

Tenure of manager - longevity and investment experience also contribute to generating consistent returns.

Cumulative performance is another attribute. This criteria will distinguish the one hit wonders from the rest of the pack. It is often easy to fall for great performance for one year - check carefully that this same performance adds up over time, or you could be investing in a falling star.

Volatility - you may be willing to accept more risk for consistently higher returns, but certainly not for lower returns. Watch this category.

Size of fund - Industry critical mass for mutual fund efficiency is about 90 million. Below that number, it can be far more costly for the fund shareholder.

Administrative Fees - High annual fees hurt performance, especially if that performance is mediocre at best.

Note that pension fund administrators take their job very seriously. Their investment policy committee will have used these criteria and many more to judge the overall performance of each mutual fund (and manager) that is offered in your pension plan.

There you have it. In a global sea of 80,000 mutual funds, where are yours?

Rating this hypothetical fund overall, it appears that it has performed classically for a large cap growth fund, falling in the last bear market, outperforming during the great bull run, and recovering now. In this theoretical illustrative example, should you hold or fold? For my money, it looks like a keeper, and one that will return - over the long run - better performance than the average large cap growth fund.

Seems like work, does it not? But remind yourself, this is your pension and you will need every single penny of it, ten, twenty, thirty years hence. If you care about your quality of life, it is your responsibility to care about the ongoing performance of your investments. Never be too busy to keep a watchful eye on all of them.

Subject for next week. What happens if your pension is not automatically rebalanced?.

Be wise with your money. It should only slip through your fingers once, right into an investment account.

Martha Harris Myron CPA CFP? is a Bermudian, a Certified Financial Planner™(US licence), Manager, Financial Planning and VP, Private Client Services at Bank of Bermuda. She holds a NASD Series 7 license, and formerly owned a US financial services practice meeting the needs of 400 individual and corporate clients.

Confidential Email can be directed to marthamyron@northrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.