Guide on Reading the Performances of Fund
Preliminary
The performance of funds may be presented within the timeframe of a calendar year (which facilitates the universal comparison of funds), and/or by its financial periods.
Irrespective of the time period chosen, the total returnswould reflect fairly the returns of funds during each chosen period. This is because the total returns of a fund represent the rate that an investor would have earned or lost each year on an investment in a fund (assuming reinvestment of all distributions of income and capital gains).
Distribution Yield
is the (income) distribution declared for the year divided by the average buying price of the unit for that year. The resulting percentage outcome may then be compared directly across board with yields from other investment instruments/avenues e.g.fixed deposits.
All said and done, the first thing that a unitholder must keep in mind when reading the returns of funds, is one important maxim of investing; the higher the risk of losing money, the higher the potential reward. The reverse is generally true. So as you consider an investment in a unit trust fund, you should take into account your personal tolerance for the daily fluctuations of the stock market and the timeframe of your investment. Securing capital growth would also require long term investment in a fund.
The key to securing capital growth in unit trusts lies in long term investing. For it is through long term investing that we can reasonably expect to reap the growth value of a stock.
Reading the performance of funds
Annual Returns
There are four performance main indicators upon which to help you determine the investment performance of funds i.e annual returns, cumulative returns, annual compounded rate of returns and volatility of returns. These complement each other in giving a holistic picture of a fund's performance. These indicators are highlighted in bold below as you read to guide you on how to use them to assist you in analysing the performances of funds.
Bar Chart I and table below on theannual returns of Public Savings Fund provide an indication of the risk and reward of investing in the fund. They showed the fund's performance in each calendar year since 1991 backdropped against the KLSE CI returns over the same period. The KLSE CI returns gave indications of the various market conditions against which the fund had to perform in achieving the returns shown.
Analysis : For most calendar years where market conditions are relatively stable, the Public Savings Fund performed better than returns of the KLSE CI in spite of being a unit trust fund that should track the CI by a beta of 0.75 i.e. if the KLSE performed 50% for year 1993, it would be considered a good performance for Public Savings Fund if it were to return 37.5% over the same period. For the more volatile years of 1994 and 1997, the fund did not perform as badly as the overall market, losing less than the KLSE CI in their performances.
Cumulative total returns
After noting the annual returns and associated risk, the investor should look to the cumulative (long term) total returns of Public Savings as shown under Table II(a) which gives the picture of how the fund would have performed over a stretch of time in the long term i.e. from point X in year one to point Z five years later (unitholders being long term investors). Further, they would look at the rate at which their returns had compounded over the selected period to arrive at their final investment value/outcome. This is shown under Table II (b) on annual compounded rate of return. To complete the picture, the volatility of such returns over the different periods is also given under Table III.
Volatility of Returns
The volatility of returns shows the fluctuations in value of a unit of the fund. The greater the fund's volatility, the wider the fluctuations between its high and low prices. A standard deviation of minus or plus 5% from the norm is the tolerable/acceptable margin (of error) against which to gauge the risk (or probability of) to securing such stated returns i.e. if the volatility is a plus or minus 5.0, it would mean that there is practically no risk/little volatility involved in securing the rate of return indicated in the Table II. In short, the higher the volatility, the higher risk of that fund's securing that rate of return.
For illustration, if Fund A and Fund B (of same fund objective) achieved the same 5-year rate of return. However, the volatility of Fund A's rate of return is 13.3 compared to Fund B's 7.5. Based on such historical facts, Fund B would be a safer and thus better fund to invest in than Fund A, ceteris paribus.
Annual Compounded rate of return
The annual compounded rate of return gives the value at which your investment would compounded from year to year based on the cumulative returns over the period. In the financial world, a 10% compounded rate of return for an investment is considered to be very good since an investor would double his principal in 7.2 years at that rate. And it is considered difficult to obtain that kind of return at low risk.
Thus looking at the 3-year cumulative returns of Public Savings Fund vis its annual compounded rate of return of 11.6% p.a. to the investor, you would conclude that a big part of the gains made by PSF was in the earlier part of the period being reviewed, and that the gains were well spread and quite evenly compounded over the period. For the negative 5-year returns, the lost was similarly minimised. Hence, for the 10-year annual compounded rate of return of 8.5% p.a. is good. At this rate the investor would have doubled his money in PSF in just 8.5 years!.