A long-only equity fund specializing in S&P/TSX 60 companies has consistently underperformed the S&P/TSX Composite Index over the past five years. The fund's objective is to outperform the S&P/TSX 60 Index. What is the most appropriate action for assessing the fund's true performance?

Question: A long-only equity fund specializing in S&P/TSX 60 companies has consistently underperformed the S&P/TSX Composite Index over the past five years. The fund's objective is to outperform the S&P/TSX 60 Index. What is the most appropriate action for assessing the fund's true performance?

Answer options:

• Switch the benchmark to the S&P 500 Index due to broader market exposure. ✅ Evaluate the fund's performance against its stated benchmark, the S&P/TSX 60 Index, rather than the S&P/TSX Composite Index.
• Recommend increasing the fund's exposure to international equities to diversify.
• Suggest the fund manager implement a tactical asset allocation strategy.

Correct answer: Evaluate the fund's performance against its stated benchmark, the S&P/TSX 60 Index, rather than the S&P/TSX Composite Index.

Explanation: The most appropriate action is to evaluate the fund against its stated objective and benchmark, the S&P/TSX 60 Index. Comparing it to a different index like the S&P/TSX Composite (which includes smaller companies) would be an unfair comparison.