While attending a monotone fund manager presentation last week, I was going through the latest fund information they had given us. Looking at graphs and percentage returns, it struck me how misleading this sort of information could be over a short period of time. I was looking at three and six month returns of three different funds. One showed a far greater return than the others. But if one took into account a couple of starting and ending points, the figures were not so impressive. Let me try to explain.
Let’s assume Fund A shows a return of 12% over 6 months and Fund B shows 5% over the same time period. It would be quite natural to be impressed with the 12% return and some folk would want to switch to this fund or use it, in an attempt to chase past performance. Putting this into numbers, let’s say that 9 months ago Fund A was worth R100 and Fund B was worth R101. Then let’s assume that the next three months experienced a drop in the stock markets, taking Fund A down to R86 and Fund B down to R98. From this point forward, Fund A experiences 12% growth and Fund B the 5% growth. Thus the value of Fund A lands up at R96.32 six months later and Fund B at R102.90. Not so impressive now. Fund B is worth more and was less volatile, maybe due to better stock picking by the relevant manager.
What I am attempting to illustrate, is that it is often important to know where a fund has been or what it’s strategy or purpose is, when measuring or taking in the returns. The longer the measured time period the less these factors play a roll. Thus worrying about returns from stock market influenced investments over anything less than 3 years can be a bit misleading. It will be indicative of some things, but not enough to select the manager on alone.