Over the past three weeks we’ve looked at the history of the S&P/TSX Index, the numbers behind it, and identified it as being a closet mutual fund. Today we’re looking at if we can use it as a historical comparison and what conclusions we can draw from this. Ready?
Now given the changes in the S&P/TSX Index, you have to wonder…is studying its historical performance and drawing conclusions from it still relevant for today’s investors?
The Toronto Composite Index: Can You Make a Historical Comparison?
Well, ask yourself this question: If a mutual fund has a 10-year average annual performance of say 10%, but the current managers have only been managing the fund’s investments for the last three years, is it right to give them credit for the performance in the first seven years?
I don’t think so – and the S&P/TSX Composite Index should not be credited with the performance of the TSE300 Composite Index prior to 2002 either.
Since the S&P/TSX Composite Index is not constructed, or managed with the criteria, guidelines (or management) as the old TSE300 – how can you compare the two? Just like a mutual fund, today’s index managers had no connection with the TSE300 Index’s previous performance and, thus, have no claim to its history.
So, if the S&P/TSX Composite Index is now a closet mutual fund, its performance began in 2002 – no earlier. Thus the TSE300 Composite Index’s performance during the past demographic trends, economic, and stock market cycles can no longer be used as a reference by investors, advisors, and money managers.
This also implies that all of the historical data (1977 to 2002) and technical indicators (Index Price-to-Earnings Ratios, Index Highs and Lows, Trading Volumes, Moving Averages, etc.) cannot be used to compare and assess today’s S&P/TSX Composite Index values. Investors can only use the data and technical information from 2002 onward.
Today’s Composite Index is not the index it once was and hasn’t been for almost 10 years. Even the most experienced investors, however, are unaware that the structure and management of the Index has changed so substantially. But these two very important changes to the very fabric of the Index must be considered.
The Toronto Composite Index: Conclusion
What are we to conclude about all this? Well, the next time you read, hear, or watch a commentary about the ups and downs of the S&P/TSX Composite Index you should stop and ask yourself the following questions:
- Is it relevant to my investment portfolio?
- Do I manage my investments with the same frequency and guidelines as the Index committee?
- Is it relevant as a gauge for the overall stock market?
- Is the Index’s performance any more useful than the performance of any other mutual fund?
- Are the Index’s current data and technical indicators useful when evaluating my investment options?
If you answered no to any of these questions, then maybe the Toronto Composite Index has become no more than a closet mutual fund and, as such, it really shouldn’t hold any relevance for investors today.