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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.
|
<TBODY> |
Fund
5yr annualized return |
Benchmark
5yr annualized return |
Relative
5yr annualized return |
|
Fund A |
29.9% |
25.5% |
3.5% |
|
Fund B |
27.9% |
25.5% |
1.9%</TBODY> |
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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