13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

Key Takeaways Explain This Topic AI

Units are redeemed at the next calculated NAVPS, and each redemption in a non-registered account realizes a capital gain or loss.

A fixed-percentage withdrawal plan adjusts payments to the account value; a fixed-dollar plan can exhaust capital after poor returns.

Funds should be compared with an appropriate benchmark and peer group, using quartile rankings over several periods.

The CSA risk rating is based on 10-year standard deviation: low (under 6%), low to medium (6% to under 11%), medium (11% to under 16%), medium to high (16% to under 20%), high (20% or more).

Survivorship bias inflates historical average fund returns because poor funds are merged or closed.

Last updated: October 2026

Redeeming Mutual Fund Units

An investor can redeem units on any valuation day at the next calculated NAVPS, less any applicable charges (for example, a short-term trading fee of 1% to 2% that many funds charge on units redeemed within 30 to 90 days). Mutual fund purchases and redemptions moved to a T+1 settlement cycle in May 2024 along with Canadian securities markets.

Systematic Withdrawal Plans

Retirees often take regular income through a systematic withdrawal plan :

• Plan How it works Risk
• Fixed-dollar Withdraw a set amount (e.g., $1,000 a month) Capital may be exhausted if returns are poor

Fixed-percentage Withdraw a set percentage of the account value each period Income rises and falls with the account

Life-expectancy (liquidation) Spread the capital over the expected payout period so it is used up by a target date Nothing is left if the investor outlives the plan

Tax on Redemptions

In a non-registered account, every redemption is a disposition: the investor realizes a capital gain or loss equal to the proceeds minus the adjusted cost base of the units redeemed. Switching between two mutual fund trusts is also a disposition. Distributions received during the year are taxed separately, and reinvested distributions add to the ACB. T-series units pay monthly distributions that are largely return of capital, which defers tax but lowers the ACB.

1. Performance Evaluation: Benchmarks, Tracking Error & Quartiles

Evaluating a mutual fund manager requires more than simply observing raw annual returns. Analysts must determine whether returns were generated through genuine managerial skill (alpha) or simply by riding broad market momentum.

1. Appropriate Benchmark Selection

A fund's performance must be compared against a relevant, transparent, and investable benchmark index reflecting the same asset class and geographic universe:

• Canadian Equity Funds → \rightarrow → S&P/TSX Composite Index
• Canadian Fixed-Income Funds → \rightarrow → FTSE Canada Universe Bond Index
• US Equity Funds → \rightarrow → S&P 500 Index
• Global Equity Funds → \rightarrow → MSCI World Index
• 2. Tracking Error

Tracking error measures how closely an investment fund follows its benchmark index over time. Statistically, it is calculated as the annualized standard deviation of the difference between the fund's returns ( R f R_f R f ​ ) and the benchmark's returns ( R b R_b R b ​ ):

Tracking Error = σ ( R f − R b ) = 1 n − 1 ∑ t = 1 n [ ( R f , t − R b , t ) − ( R ˉ f − R ˉ b ) ] 2 \text{Tracking Error} = \sigma(R_f - R_b) = \sqrt{\frac{1}{n-1}\sum_{t=1}^n [(R_{f,t} - R_{b,t}) - (\bar{R}_f - \bar{R}_b)]^2} Tracking Error = σ ( R f ​ − R b ​ ) = n − 1 1 ​ ∑ t = 1 n ​ [( R f , t ​ − R b , t ​ ) − ( R ˉ f ​ − R ˉ b ​ ) ] 2 ​

Passive Index Funds: Target a tracking error near zero (typically < 0.50% ), indicating that the fund mirrors index performance closely after fees.

Active Mutual Funds: Display higher tracking error (commonly 2.0% to 6.0%+ ). A high tracking error reflects active managerial bets—holding portfolio weights that deviate significantly from index constituents.

3. Peer Group Analysis and Quartile Rankings

In Canada, funds are evaluated against their specific CIFSC peer group across rolling 1-, 3-, 5-, and 10-year time horizons using quartile rankings : CIFSC Peer Group Quartile Performance Distribution:

• Top 25% Performers 26% to 50% Range 51% to 75% Range Bottom 25% Performers
• [ 1st QUARTILE ] [ 2nd QUARTILE ] [ 3rd QUARTILE ] [ 4th QUARTILE ]
• Top-tier alpha Above average Below average Lagging peers

1st Quartile: Top 25% of all funds in the category (highest relative returns).

2nd Quartile: 26th to 50th percentile (above-average returns).

3rd Quartile: 51st to 75th percentile (below-average returns).

4th Quartile: Bottom 25% of all funds in the category (lagging performers).

Advisory Insight: When conducting client reviews, advisors examine quartile consistency over multiple rolling periods. A fund manager who consistently ranks in the 1st or 2nd quartile across full market cycles demonstrates more repeatable investment skill than a manager with volatile swings between the 1st and 4th quartiles.

2. Risk-Adjusted Performance: The Sharpe Ratio

Raw investment return is an incomplete metric because it ignores the magnitude of volatility endured to generate that return. In Canadian portfolio analysis, the standard metric used to evaluate risk-adjusted return is the Sharpe Ratio (developed by Nobel laureate William Sharpe).

The Sharpe Ratio Formula

Sharpe Ratio = R p − R f σ p \text{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p} Sharpe Ratio = σ p ​ R p ​ − R f ​ ​

Where:

R p R_p R p ​ = Annualized compound return of the mutual fund portfolio

R f R_f R f ​ = Risk-free rate of return (in Canada, represented by the yield on a 91-day Government of Canada Treasury bill )

• ( R p − R f ) (R_p - R_f) ( R p ​ − R f ​ ) = Excess Return earned above the risk-free rate
• σ p \sigma_p σ p ​ = Annualized standard deviation of the mutual fund's monthly returns (total risk)
• Interpreting the Sharpe Ratio

The Sharpe ratio quantifies the excess return generated per unit of total risk (standard deviation) :

A higher Sharpe ratio indicates superior risk-adjusted efficiency; the manager delivered more return per unit of volatility.

A lower Sharpe ratio indicates that high raw returns were accompanied by excessive volatility.

Step-by-Step Worked Numeric Walkthrough: Comparing Risk-Adjusted Returns

A Canadian wealth advisor evaluates two competing Canadian equity mutual funds over a 5-year investment cycle. The 91-day Government of Canada Treasury bill rate averaged 2.50% ( R f = 0.025 R_f = 0.025 R f ​ = 0.025 ).

Fund Alpha (Aggressive Resource Fund):

• Annualized Return ( R A R_A R A ​ ) = 12.50%
• Annualized Standard Deviation ( σ A \sigma_A σ A ​ ) = 18.00%

Fund Beta (Conservative Dividend Growth Fund):

• Annualized Return ( R B R_B R B ​ ) = 9.75%
• Annualized Standard Deviation ( σ B \sigma_B σ B ​ ) = 9.50%
• Step 1: Calculate the Sharpe Ratio for Fund Alpha

Sharpe A = 12.50 % − 2.50 % 18.00 % = 10.00 % 18.00 % = 0.5556 ≈ 0.56 \text{Sharpe}_A = \frac{12.50\% - 2.50\%}{18.00\%} = \frac{10.00\%}{18.00\%} = 0.5556 \approx 0.56 Sharpe A ​ = 18.00% 12.50% − 2.50% ​ = 18.00% 10.00% ​ = 0.5556 ≈ 0.56

Step 2: Calculate the Sharpe Ratio for Fund Beta

Sharpe B = 9.75 % − 2.50 % 9.50 % = 7.25 % 9.50 % = 0.7632 ≈ 0.76 \text{Sharpe}_B = \frac{9.75\% - 2.50\%}{9.50\%} = \frac{7.25\%}{9.50\%} = 0.7632 \approx 0.76 Sharpe B ​ = 9.50% 9.75% − 2.50% ​ = 9.50% 7.25% ​ = 0.7632 ≈ 0.76

Step 3: Comparative Analysis

At first glance, a retail client might choose Fund Alpha because its raw return was 2.75 percentage points higher (12.50% vs. 9.75%).

However, Fund Beta achieved a Sharpe ratio of 0.76 , compared to only 0.56 for Fund Alpha.

Fund Beta earned 0.76 percentage points of excess return for each percentage point of standard deviation , whereas Fund Alpha earned only 0.56 . Fund Beta delivered significantly superior risk-adjusted performance, providing a smoother, more efficient compounding journey for the investor.

3. Regulatory Volatility Risk Classification (CSA 10-Year Standard Deviation Scale)

Under National Instrument 81-102 , the Canadian Securities Administrators mandate a standardized, objective methodology for determining the fund risk rating published in the Fund Facts document. Fund managers cannot assign subjective risk ratings; they must strictly apply the fund's 10-year annualized standard deviation of monthly returns : CSA Standardized Volatility Risk Classification Scale:

• 0% 6% 11% 16% 20%+
• ├─── Low Risk ──────┼── Low to Medium ──┼─── Medium Risk ───┼── Med to High ────┼── High Risk ───>
• Money Market • Broad Bond • Balanced Funds • Core Canadian • Sector Funds
• Short-term GoC Funds • Dividend Funds & US Equities • Precious Metals
• The Mandated Standard Deviation Risk Bands

• CSA Risk Classification Band 10-Year Annualized Standard Deviation ( σ \sigma σ ) Representative Fund Mandates
• Low 0% to less than 6% Canadian Money Market, Short-Term Government Bond Funds
• Low to Medium 6% to less than 11% Canadian Broad Bond Funds, Conservative Balanced Funds
• Medium 11% to less than 16% Balanced Growth Funds, Canadian Dividend Equity Funds
• Medium to High 16% to less than 20% Canadian Core Equity, US Equity, Global Diversified Equity
• High 20% or greater Specialty / Sector Funds, Emerging Markets, Precious Metals

Note on New Funds: If a fund has less than 10 years of operating history, the manager must use the actual return history of the fund and impute the remainder of the 10-year period using the monthly returns of an approved, highly correlated reference benchmark index.

4. Survivorship Bias in Performance Measurement

When advisors and investors analyze historical performance tables across the Canadian mutual fund industry, they must account for a pervasive statistical distortion known as survivorship bias . The Mechanics of Survivorship Bias:

• Year 1: 1,000 Funds Launched
• │
• ├─ Underperforming funds bleed assets & lag peers
• ▼
• Year 5: 300 Poorly Performing Funds Terminated or Merged into Flagship Funds
• │
• ▼
• Year 10: Historical Database Evaluates ONLY the 700 Surviving Funds
• │
• ▼
• [ DISTORTION ]: Average Industry Return is Artificially Inflated
• Measured Portfolio Volatility and Failure Risk are Understated
• How Survivorship Bias Occurs

Fund management companies regularly review their product lineups. When a mutual fund chronically underperforms its benchmark, experiences persistent asset redemptions, or generates poor quartile rankings, the IFM frequently takes one of two actions:

Fund Liquidation: The fund is dissolved, underlying securities are sold, and remaining cash is returned to unitholders.

Fund Merger: The poorly performing fund is merged into a larger, better-performing flagship fund within the same fund complex.

The Impact on Historical Performance Data

Commercial mutual fund performance databases often drop defunct or merged funds from their historical tracking records, tracking only the funds that survived to the present day :

Artificially Inflated Average Returns: Because the funds that disappeared were overwhelmingly the worst performers, removing them from the historical sample skews the historical industry average return upwards, and studies of fund databases find the distortion can be material.

Understated Risk: Measured downside volatility and maximum drawdowns appear artificially mild because the funds that suffered catastrophic losses are excluded from the dataset.

Advisory Responsibility: Registered representatives must exercise caution when presenting long-term industry averages or manager track records to clients, recognizing that survivorship bias creates an overly optimistic portrayal of active management results.