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How to Compare Mutual Funds!
By Ali Jaffery

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Lies, damn lies and performance numbers. Some things to think about when looking at performance tables.
Because fund management is as much art as science and even the greatest artists have bad days occasionally, nothing much can be gained by looking at short term performance numbers. Over short periods of time even the most skilful of investors can appear to be swimming against the tide. It is therefore, only by looking at longer time periods of performance that it is possible to differentiate between skill and luck. As a result, one should only carry out performance analysis on funds with at least a three year performance history.
It is an unfortunate fact, however, that even long term performance numbers are not always presented in the most informative way - and sometimes they can be downright misleading. When performance figures are produced they may suffer one or more of the following problems:
1. Performance is presented as a "snapshot" view.
The biggest and most frequent problem with performance tables is that they only give you a snapshot of a funds performance taken at one moment in time. The performance might look great today but yesterday it looked lousy - and tomorrow it might look lousy again. Because all funds go through good and bad times a snapshot view of performance can hide all sorts of nasty surprises. That is why what is really needed is information on the performance over a range of time periods. This is commonly referred to as time series analysis. Consider the following example.
Say you had to choose between two Equity Funds (Funds A and B) then it would be a major surprise if both funds did not provide performance information, preferably compared to a suitable benchmark. The table below shows the 5yr performance numbers for both funds and shows that both have done very well versus their benchmarks over this period. 


5yr annualized return

5yr annualized return

5yr annualized return

Fund A




Fund B




On first glance it might appear that both managers have done very well over the last five years and it would be difficult to choose one over the other. However, all is not what it seems. If one plots their historical performance versus the benchmark over the last 5 years it can been seen that the Funds have achieved their performance records in quite different ways. The charts on the next page show the rolling 1yr and 3yr relative returns versus a benchmark index for each Fund.

The chart for Fund A demonstrates how whilst it has had some good and bad years (shown by the 1yr line) it has built its impressive performance record with consistently good three year periods. One would consider this to be an attractively consistence performance record worthy of more research. Fund B on the other hand has had a much more turbulent time. Although its five and three year records are both above the benchmark at this moment in time, the rolling three year performance line in the chart line has spent a lot of time below the benchmark in the last 5 years and has in fact only risen above the benchmark in the last few months. For this fund, the good five year performance numbers hide a much less consistent track record which is therefore much less attractive as a potential investment.

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