Un­der­stand­ing the me­chan­ics of per­for­mance is a vi­tal weapon in your fund in­vest­ing ar­moury

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Crack­ing the per­for­mance code

Among the prime con­sid­er­a­tions when se­lect­ing a fund or in­vest­ment trust for port­fo­lio in­clu­sion – and re­mem­ber there’s a be­wil­der­ing ar­ray of op­tions avail­able – is the small mat­ter of per­for­mance.

Even a ca­sual ob­server of the in­vest­ment scene will have come across the well-worn phrase ‘past per­for­mance is no guide to the fu­ture’, and yet care­ful scru­tiny of past per­for­mance can help you to un­der­stand the char­ac­ter­is­tics of a fund and the pedi­gree of the man­ager mak­ing the as­set al­lo­ca­tion de­ci­sions.

Per­for­mance data is read­ily avail­able on the web­sites of in­di­vid­ual fund providers, fund su­per­mar­kets and plat­forms in­clud­ing Youin­vest, and via the fund fact­sheet or spe­cial­ist web­sites in­clud­ing Trust­net or Morn­ingstar.

That said past per­for­mance met­rics gen­uinely aren’t a re­li­able guide to fu­ture per­for­mance. You’ll still need to ask whether the per­for­mance re­turn de­notes cap­i­tal re­turn or to­tal re­turn, if the per­for­mance is shown be­fore or after tax and be­fore or after charges, how the port­fo­lio has per­formed rel­a­tive to its bench­mark and how is it per­form­ing ver­sus other funds in its sec­tor.

You’ll also be look­ing for ab­so­lute per­for­mance, rather than rel­a­tive to a bench­mark and also to find out whether the past per­for­mance shown on the fact­sheet is the fund man­ager’s en­tire track record; the cur­rent man­ager may only have been run­ning the port­fo­lio for short while, ren­der­ing his­tor­i­cal, long term data largely ir­rel­e­vant.


The ma­jor­ity of fund fact­sheets show to­tal re­turn fig­ures, sig­ni­fy­ing the re­turn you would have re­ceived from rein­vest­ing the fund’s in­come into the fund. Nor­mally, per­for­mance data are pro­vided for one, three and five year pe­ri­ods, stretch­ing to ten years for longer es­tab­lished funds, as well as the per­for­mance since launch and in in­di­vid­ual years.

In the unit trust and OEIC uni­verse, per­for­mance data is com­pared against a rel­e­vant sec­tor from the In­vest­ment As­so­ci­a­tion (IA) and typ­i­cally shows the fund’s rank­ing within the sec­tor over dif­fer­ent time pe­ri­ods.

Fund fact­sheets also sup­ply ‘cu­mu­la­tive’ and ‘dis­crete’ per­for­mance data, on a per­cent­age growth ba­sis, the for­mer pre­sented as a graph and the lat­ter as a bar chart on the fact­sheet.

Cu­mu­la­tive per­for­mance shows the ag­gre­gate per­for­mance from a fund from launch over var­i­ous time pe­ri­ods

from launch and rep­re­sents the port­fo­lio’s over­all long-term per­for­mance.

Dis­crete per­for­mance refers to a spe­cific se­ries of pe­ri­ods. For ex­am­ple, dis­crete quar­terly or dis­crete an­nual per­for­mance would show a fund against its bench­mark for each quar­ter or year since its launch.

In short, it makes sense to eval­u­ate a fund man­ager’s per­for­mance on both mea­sures, since the cu­mu­la­tive per­for­mance could be flat­tered by a short pe­riod of stel­lar per­for­mance when the stock picker’s in­vest­ment style or sec­tor was in fash­ion.

Ex­am­in­ing the per­for­mance in dis­crete pe­ri­ods can tell you if the man­ager has con­sis­tently out­per­formed or de­liv­ered a lumpy per­for­mance. An­other term you might en­counter is an­nu­alised re­turn, which refers to the con­ver­sion of the re­turn on an in­vest­ment into a yearly rate.


In­vestors shouldn’t solely rely on a fund’s long term past per­for­mance record, since this can po­ten­tially lead to a mis­read­ing of the big­ger pic­ture.

For ex­am­ple, a fund with a strong 10-year per­for­mance track record may have de­liv­ered ex­cep­tion­ally strong per­for­mance for the first two years fol­low­ing launch, and then had poor or be­low aver­age per­for­mance for the sub­se­quent eight years. In­vestors should there­fore be fac­tor­ing in a re­view of dis­crete cal­en­dar year per­for­mance.

This would in­volve look­ing at each year to see if the man­ager has con­sis­tently beaten the fund’s bench­mark. A man­ager that beats their bench­mark six or seven years out of ten is do­ing well and is more likely to de­liver con­sis­tent out­per­for­mance in the fu­ture.

Also, if you are won­der­ing why the data for the same fund are dif­fer­ent, this will be be­cause there are dif­fer­ent types of units or shares; an ‘in­come’ class that pays out div­i­dends di­rectly into your deal­ing ac­count, ISA or SIPP and an ‘ac­cu­mu­la­tion’ class that rolls up div­i­dends and other forms of in­come and puts them back into the fund.

This has the ef­fect of in­creas­ing the value of each unit or share held, which will drive up the per­for­mance fig­ures.

As the lat­est Trust­net data for In­vesco Per­pet­ual Global Smaller Com­pa­nies Z Acc (B8N46D9) re­veal, the Nick Mus­toe-man­aged fund has de­liv­ered a five-year cu­mu­la­tive per­for­mance re­turn of 90.1% ver­sus 75.6% for the IA Global sec­tor, a su­pe­rior per­for­mance than shown for the in­come

class, In­vesco Per­pet­ual Global

Smaller Com­pa­nies Inc, up 83.1% ver­sus 75.6% for the afore­men­tioned sec­tor.

Sig­nif­i­cantly, the dis­crete per­for­mance data for this fund pro­vides you with a clearer pic­ture of per­for­mance ver­sus the sec­tor in dif­fer­ent pe­ri­ods and mar­ket con­di­tions; for in­stance, the fund was com­fort­ably ahead on a 36-48 month view, but is be­hind the sec­tor on a 0-12 month view.

In­vestors seek­ing a deep dive into per­for­mance can also visit Morn­ingstar, where you can ex­am­ine a fund’s an­nual price re­turn and its an­nual re­turns plus or mi­nus its ‘cat­e­gory’, Global Small-Cap Eq­uity in the case of In­vesco Per­pet­ual Global Smaller Com­pa­nies, and plus or mi­nus its ‘cat­e­gory in­dex’, be­ing the MSCI World Small Cap here.

Morn­ingstar also pro­vides the fund’s an­nu­alised re­turns over one, three, five and ten years. ‘+/- Cat­e­gory’ shows how the fund has per­formed com­pared to the aver­age of all of the funds in the same cat­e­gory. (JC)

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