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Mutual Funds… A walk through history

Pablo Sánchez

21/02/2019

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Mutual funds are one of the most used investment vehicles in the world. In this post let’s see how they behaved in recent years.

What is a mutual fund?

It is possible to define a mutual fund as follows:

“A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s investments and attempt to produce capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.” source Investopedia.

Equity (or stock) funds

An Equity fund is a type of mutual fund that invests principally in stocks. These funds are categorized according to company size, geography and the investment style of its holdings. In general, Equity funds are a risky investment because it is possible to get high incomes by assuming high losses.

In the next plot, each point represents the annual return of one Equity fund we have stored in our database. We can see the wide range of annual returns these funds have. We could expect an annual return between -70% and 120% more or less.

  • The best 3 years in the analysed period are 2003, 2005 and 2009. Specifically, the best year in the analysed period is 2009 with returns in the range (-3%, 120%).
  • The worst 4 years in the analysed period are 2000, 2001, 2002 and 2008. Specifically, the worst year in the analysed period is 2008 with returns in the range (-70%, 5%).

Annual returns of Equity funds by currency

If we group returns by currency or region and calculate the percentage of Equity funds with positive returns, we can see more clearly the differences between the best and the worst years.

In general, the currency and region appear to have little impact on the sign of the annual returns. The positive and negative years tend to coincide. The groups that most stand out are Asia-Pacific and the Japanese Yen.

Percentage of Equity funds with positive returns

Percentage of Equity funds with positive returns by region

Fixed Income (or Bond) funds

A Bond fund is a type of mutual fund that invests principally in bond and other debt instruments. These funds are categorized according to their focus which is related to the type of debt they invest. This may include government, corporate, municipal and convertible bonds. In general, Bond funds are a safe investment because it is possible to get low and positive incomes by assuming low volatilities.

In the next plot, each point represents the annual return of one bond fund we have stored in our database. We can see a smaller range of annual returns in comparison to equity funds. We could expect an annual return between -15% and 30% more or less (without taking into account 2008 and 2009). In general, we can see a lot of funds with positive annual returns.

  • The best year in the analysed period is 2009 with returns in the range (-5%, 60%).
  • The worst year in the analysed period is 2008 with returns in the range (-40%, 20%).

Annual returns of Fixed Income funds

If we group returns by currency or region and calculate the percentage of Bond funds with positive returns, we can see a high percentage of Bond funds with positive annual return. In this case, there are higher differences between funds in different currencies or regions.

Percentage of funds with positive returns by currency

Percentage of funds with positive returns by region

Combining the previous swarm plots (Equity & Bond funds), 2000-2002, 2008 and 2011 were bad years for investing in Equity funds but it was possible to get income from Bond funds. It is easy to see 2018 as the unique year where the percentage of both types of funds with a positive annual return is below 20%.

Annual return distribution by risk family