By Tom Bradley

In last Saturday’s Report of Business, Rob Carrick wrote an article about low volatility mutual funds (The Hidden Dangers in Playing it Safe). The Steadyhand Equity Fund was one of six funds he highlighted as having a positive return over the last five years and a beta of less than 0.75.

Beta measures the volatility of a security or fund in comparison to the market as a whole. A beta of 1.0 means a fund’s movements are exactly in line with the index. A number under 1.0 means the fund is less volatile and over 1.0 means more volatile.

At Steadyhand, we’ve designed our funds and hired managers with the hope of providing a slightly smoother ride for our clients – i.e. gentler ups and downs. Beta is one measure of that ride.

Coincidentally, Rob’s article followed on the heels of a meeting I had with a consultant last week. In the course of the conversation, he told me he liked our Small-Cap Equity Fund, but it was too volatile to put on his recommended list. In this case, the volatility he was referring to wasn’t beta (which is a low 0.48 over 5 years), but rather tracking error – a measure of how closely the fund tracks the BMO Nesbitt Burns Small Cap Index.

His take on the Small-Cap Equity Fund was interesting, because while it has performed much differently than the index over its 5+ years (i.e. high tracking error), it’s been considerably less volatile than the index. It has held up better in weak periods (and in some cases gone up) and risen less in hot markets. The manager, Wil Wutherich, has done exactly what we wanted him to do, which is to provide good long-term returns and be a counterbalance to the other securities in our clients’ portfolios.

The consultant’s comment and Rob’s article are good reminders that we have to be clear as to what we mean by risk and volatility. The industry measures everything against the index. Our clients measure their comfort factor and how they’ve done by comparing their return to what they could have earned if they’d left their money in the bank.