Friday, May 30, 2008

Question from a reader

I recently received the following question from one of my regular readers:

"I'm having difficulty understanding how I can compare the performance of two mutual funds, for example lets consider XSB (ishares bond index) and XIC (ishares S&P/TSX index).Traditionally the way I'd evaluate the historical performance of these funds is to look at the change in share price over a period of time (say five years). Lets say the share price in one went up 22% in that period and the other went up 44%.But now I realize that, both of these funds pay dividends. Lets say the first one averages 4%/year while the other pays 2%. This complicates the equation immensely, in terms of determining the actual return on investment.Ideally the sort of analysis I'd like would be something like: - what if I put one million dollars in both funds 5 years ago - and then re-invested any dividends - and then sold the funds at market value today, and payed any taxes out of the proceedsThis to me seems like a good way of modeling the real return of those funds over the investment period.So my question is...are there any tools or common methods for performing this kind of analysis? Mutual fund price charts are a dime a dozen, but I can't find any kind of online tool that will even roughly model this kind of analysis. Am I missing something or misunderstanding the concept of return on investments in funds?"


This is a very good question, as it delves directly into theidea that looking at charts alone might not be enough in order tocompare total returns. The last statement of course depends on thedata provider.

What I would consider doing is :

1. Going to ca.finance.yahoo.com, which is one of my favorite sitesfor stock market and dividend data.
2. Type in the symbol which you are interested in ( XSB).
3. Look over to your left, under the text " More on XSB.TO", you willfind a link to Historical Prices. We would be using the alreadycalculated historical prices from Yahoo.
4. After that you should be able to see an online table with daterange and open/high/low/close and volume daily information. You wantto focus on the "Adj Close" column at the end of the spreadsheet. It'suseful for me to look at the data in a monthly view since we will beresearching 5 years worth of returns.
5. You could see how dividends are being placed every 3 or so monthsfor XSB, and they are automatically adjusted at the "Adj Close"column. You could then download the data for the specific period youare interested for into excel.

In order to get the same information for XIC, just follow steps 1-5. Ijust went ahead and charted the total returns of XSB versus XIC from04/2003 to 04/2008.













I am sure that there are other ways to accomplish this, so I would be interested in my readers input on this one. Any comments are welcome!

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