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Look beyond the numbers when assessing fund performance

It is important to assess a fund's performance figures in the right context
Look beyond the numbers when assessing fund performance

When deciding whether to invest in an active fund, you need to look at performance. However, it is important that you evaluate it in the right context.

Make sure that the fund is outperforming relevant benchmarks and not just turning out good numbers because the area it invests in is going up. Also look at periods when the asset the fund invests in has not done well and if the fund did better, for example, by falling less than relevant benchmarks or making a positive return when they were falling.

Good returns might not be repeated. For example, does the area the fund invests in have a good outlook? Conversely, if the fund and the area it invests in have not done well is the outlook for this area looking better meaning that performance could turn up?

A fund could have made good returns because it was run by a good manager but, if that manager has left, it might not continue to. When assessing an active fund’s performance see how long its manager has run it and if they are responsible its historic record.

If a fund has done badly don’t immediately write it off. Its one, three, five and 10-year cumulative total returns can give an indication of what it might generate over time. However, these can be skewed by short-term under- or outperformance of benchmarks – particularly one- and three-year returns.

So also look at a fund’s annual calendar or 12-month total returns. If in the past calendar year or so far this year a fund’s performance is not good, it can make an otherwise strong record look less attractive. Likewise, a recent burst of strong performance can mask a poor record.