Oran Hall | Same type of fund, widely different performance

The names of the funds of collective investment schemes like unit trusts and mutual funds would suggest that funds having the same name, such as money market or equity, are exactly alike and can be compared fairly, but wide variations in their performance suggest that there are important differences between them.

By their very nature, they pool the money of many investors and invest it for their benefit. No investor has an advantage over the other. Investors who buy during the same valuation cycle pay the same price, regardless of how many units or shares each buys.

The same applies when the investment is being liquidated in part or in whole.

There are other similarities. Investors have no say in the management of the portfolios, and all have the same level of ease of entry and exit, plus there is no upper or lower limit on the level of investment an investor may make. All investors enjoy the benefits of investing in a diversified portfolio.

Diversification may be by type of security, the issuer of the security, the maturity of the security in the case of interest-bearing securities, and the currency of the security, for example. Diversification may be further achieved by investing in funds managed by different managers.

Additionally, portfolios are not customised to reflect the needs of individual investors, although investors may be able to get some level of customisation by investing in more than one fund.

There are also differences. It is the managers who determine the fees they charge against the assets of each fund. These tend to differ, and are in addition to the transaction fees charged by stockbrokers, other dealers and the stock exchange.

Notable differences tend to show in the management of the portfolios. A look at the offering circular of each fund may give some clues about them. Although many investors never see the circular, it is a key document to examine, for it indicates who manages and gives oversight to the fund, says how prices are determined, states the limits on investments, among other matters, and addresses the investment policy of the fund.

This is important as it states the investment objectives of the fund and identifies the instruments in which the managers may invest. This is key.

The instruments in which a fund invests play an important role in its performance. Add to that the quality of the management of the fund. These two factors help to explain why two funds that appear similar because of the similarity of their names may yield different results.

Much depends on the instruments within a particular asset class that a fund emphasises most. What proportion of the fund is invested in each type of security matters. The skill of the manager in selecting the best instruments and the timing in terms of buying and selling also matters.

The name of a fund does not tell the full story about it. Take money market funds, for example. From their name, a reasonable person would expect them to invest just in money market instruments. The offering document says otherwise.

Money market funds invest in other types of instruments – bonds of varying maturities, for example. Some even invest in stocks – which seems a contradiction considering that the risk profile of stocks is vastly different from that of money market funds.

It should not be surprising that the weekly reports show significant differences in the performance of the funds.

At February 19, 2025, for example, the difference in the 12-month growth rate, as measured by the percentage change between the net asset value of each unit in a unit trust over the one-year period, is sharp. Whereas one fund yielded 7.52 per cent, there were others which yielded 5.45 per cent, 4.31 per cent, 2.03 per cent, 1.93 per cent, for example. These are all Jamaican dollar funds operating in the Jamaican market.

These performances seem to suggest that the money market funds took significantly different approaches to the management of the money of the investors. One likely explanation for the variation in the returns is the degree to which money was invested outside of the money market, the rates of which were much higher than the returns of the unit trust portfolios in most cases.

One question worth asking is whether it is fair to describe some funds as money market funds, in light of the instruments in which they invest and the portion of funds which they invest outside of the money market.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com