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Understanding the mechanics of performance is a vital weapon in your fund investing armoury
Thursday 06 Sep 2018 Author: James Crux

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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