How should I check the performance of a unit trust fund?

Your unit trust management company is obliged to send you a statement quarterly showing how your fund has performed since the last quarter.

Your statement must include the change in the monetary value of your investment over the period.

While it is important to keep an eye on your fund value, checking on performance quarter by quarter – without any context – is not very useful.

Comparing to similar funds

Investors often think the most important way to check on the performance of a fund is to check how it is doing relative to other funds and that it should be at the top of these performance tables.

These tables are published in newspapers and on websites. The data providers use the change in the fund’s net asset value and the dividends and interest distributed over various periods to calculate these returns.

The total returns are then averaged over the different periods to determine an average return per year.  

Analysing the performance of a fund relative to the funds in its sub-category or peer group is one aspect of analysing performance, and can be useful when you choose a fund in which to invest.

You should remember the following when you compare your fund to others:

• Performance tables reflect your fund’s past performance and while it might create an expectation that the fund will continue to perform well, there is no guarantee that it will.
• The returns shown assume you reinvest any interest, income and dividends your fund earns. Your returns will be very different if these are paid out to you regularly.
• The tables allow you to compare funds to their peers in the same unit trust sub-category, but you should not compare funds from different sub-categories as they have different investment universes.
• It is also not very useful to compare the performance of most funds over very short periods – only money market, interest-bearing short-term funds and low equity and income multi-asset funds, should be compared on anything less than three years.
• A fund fully or largely exposed to shares should not be compared over a period of anything less than five years. Ideally the period should be long enough to include both a bull (up) and bear (down) market period. This is known as performance through the cycle.
• Tables showing unit trust performance returns over various periods are a snapshot in time – they show you who was the first horse past the post for a particular month or quarter. They don’t show which funds consistently deliver good performance.

Comparing to a benchmark

It is also useful to check the performance of the fund in which you have invested relative to its benchmark, which is typically an index tracking the set of shares or bonds or other securities in which your fund can invest - for example, the FTSE/JSE All Share index for South African equity general funds.

Some data providers’ performance tables include the default unit trust category benchmark if there is one.

Funds, however, may have a benchmark that differs from the category one – for example, a South African equity general fund may have the FTSE/JSE All Share Capped index as a benchmark instead of the FTSE/JSE All Share index. This capped index limits exposure to any single share to 10% of the index.

A fund with an individual benchmark that differs from that of the category benchmark may perform better or worse than that benchmark because of its more limited holdings or universe.

When you consider the performance of a fund relative to its benchmark, also be sure to compare it over an appropriate period as a fund’s strategy may aim to outperform the benchmark over a three-year period, but in order to do so it may underperform in a benchmark over a one-year period.

Your own rate of return

It can be quite difficult to measure your own unique return on your investment as your investment term probably doesn’t match the measurement periods used by data providers. In addition, you may have made regular or ad hoc additions to, or withdrawals from, your investment.

Some unit trust companies include on their statements the value of the unit you have bought, less any withdrawals, so you can see in rand terms the total growth or gain on your investment.

Meeting your investment needs

The most important way to measure the performance of your fund is to check whether the returns your fund is delivering are in line over an appropriate period with the returns you need to meet your goal.

If you are investing to grow your savings to provide a sum in the future – for example, the sum you need to provide an income in retirement, the return you need to achieve your goal will typically be calculated as a return linked to the inflation rate (as measured by the consumer price index or CPI).

For example, you may need a return that is at least inflation plus five percentage points.

Some funds have these targets as their own benchmarks, but if not, you can ask your financial adviser to assist you with such an analysis. Alternatively, you will have to find out the inflation rates and calculate the target yourself in order to compare it to returns your fund has delivered.

Professional fund buyers

There are investment professionals whose job it is to dig deep into how funds perform in order to choose funds that are likely to perform well in the future.

These professionals include some financial advisers with the necessary expertise to select funds, managers of multi-managed funds and discretionary investment fund managers.

Multi-managers manage funds of funds – funds made up of a selection of other unit trust funds – or funds in which portions of the fund are outsourced to other managers to manage.

Discretionary investment fund managers select and blend funds or fund managers to manage portfolios for financial adviser’s clients.

These professionals, known as professional fund buyers, look for funds which have performed well consistently over a period of time.

Professional fund selectors typically concentrate on a fund’s risk-adjusted returns, such as the Sharpe and Sortino ratios which measure the amount of risk involved in generating returns.

They also look beyond the numbers to the quality of the manager, by considering:

• Whether the manager has a clear investment process – easy to explain and on that delivers consistent results as the manager predicts it will. Professional fund selectors look for evidence of this in the fund’s holdings and past performance in good and bad markets.
• How solid the investment team is and how they are incentivised.
• How fair the costs are on the fund.

The problem with professional fund buyers is that unless they manage a unit trust fund, their returns are not publicly disclosed.

The lesson you can learn from these professionals is that if you understand a manager’s philosophy, you will understand that periods of short-term underperformance inevitably occur from time to time and you will be more confident about staying invested to benefit over the full cycle.

There has been much research showing the pitfalls of switching regularly between funds that rank well on top performance. In doing so, however, you will be chasing past performance and you may switch from a fund that is about to perform well to one that has just done well and may possibly do less well in the immediate future.