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What unit trust performance tables don’t tell you

The importance of understanding how funds get to their performance numbers.

Many unit trust investors only worry about one thing – the return they are getting on their money. And the higher the return, the better.

There is of course sense to this. The reason anyone invests in a unit trust in the first place is to grow their wealth over time, and it makes sense to want to grow it as fast as possible.

However, focusing only on returns can lead to poor investment decisions that ultimately destroy wealth rather than building it. Chasing past performance is the most obvious mistake that many investors make. They switch between funds based on recent short-term returns, failing to appreciate that they are buying performance that has already happened, which leads to buying high and selling low. A number of studies have shown the negative impact this has on long-term returns.

Another mistake, which is linked to this, is not taking the time to understand how funds generate returns in different ways. Investors who rely purely on performance tables don’t ask how that performance came about.

An excellent example of this is the performance of the Satrix Momentum Index Fund and the Investec Value Fund over the past three years. According to figures from Morningstar, both of these unit trusts are currently amongst the top five performing funds over this 36-month period, having both delivered annualised returns of around 9%.

Yet, these funds could almost be called polar opposites. Their strategies could not be more different.

The Satrix unit trust is an index-tracker that is designed to invest in stocks that show the highest earnings and price momentum. In other words, it passively tries to capture the benefit of investing in shares whose prices are trending higher.

In contrast, the Investec Value Fund is actively managed and looks to buy cheap stocks and benefit from the rebound in their prices. It looks for opportunities in the unloved parts of the market where often share prices are falling rather than going up.

It is has long been established that the two different market factors these two funds are capturing – momentum and value – are negatively correlated. In other words, you can generally expect that when one is delivering positive performance, the other won’t be.

This is most starkly illustrated by how these two funds performed over the 2016 calendar year. The Investec Value Fund was up 62.37% in those 12 months. The Satrix Momentum Index Fund, however, was down 1.35%.

An investor who only looked at their three-year performance numbers wouldn’t see this. The slightly longer-term performance record hides these significant differences in how that performance came about.

Until the start of 2016 the Investec Value Fund had endured a long period of underperformance as value was completely out of favour. It returned -12.78% over the course of 2015.


Investec Value Fund performance

Source: Morningstar


The Satrix Momentum Index Fund, on the other hand, was enjoying the benefits of a sustained bull run in certain stocks like Naspers. For 2015, it was up 11.56%.


Satrix Momentum Index Fund performance

Source: Morningstar

A look at the three year standard deviation of these funds further supports this story. This measure, which is also often called volatility, shows how much a fund’s performance varied from its mean over a certain period of time. A lower number indicates that a fund delivered its returns more consistently, while a higher number would mean big changes in performance over short time periods.

According to Morningstar, the Investec Value Fund’s three-year standard deviation is currently 24.77. That is the highest of any fund in the South African general equity category.

The Satrix Momentum Index Funds three-year standard deviation is however less than half of that, at 10.46. This is still above average, but shows that the fund has not shown anywhere near the big swings in performance of the Investec Value Fund.

None of this is meant to indicate that one fund is better than the other. What it does show, however, is that they are very different. And any investor putting money in either of them should appreciate this.

An investor who understands how these funds look to generate returns will know what to expect from their performance in the future. They won’t be surprised when the Investec Value Fund goes through another period of significant underperformance, as it inevitably will, or that the Satrix Momentum Index Fund will profit in bull markets but struggle when the cycle turns.

The importance of this is that an investor who is prepared for these realities won’t react the wrong way when they happen. They won’t sell out of the funds at the wrong time just because short-term performance has been poor. They will know what to expect over the long term, and be able to make the right decisions for growing their wealth over decades, and not a few months at a time.

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Are these published performance figures (annualised returns) BEFORE or AFTER all the associated costs (TER, management fee, annual charge, etc)?

I realise this has been answered below, but just to clarify – for collective investment schemed (unit trusts, hedge funds and ETFs) performance figures are always after fees. That is a legal requirement.

Can someone clarify whether these published annualized returns of the various funds are netto figures, in other words, return AFTER all the associated costs such as TER, management fees, etc. are deducted?

Unit trust performance figures would be quoted net of fees

Thanks M_D

The volatility can make a huge difference. The problem with these charts is that they assume a lump sum investment at a point in time. Many investors are either making monthly contributions or else having regular repurchases to fund an income (living annuity).

In these cases, the “sequence of returns” can result in vastly different outcomes. For someone making contributions you would be happy to tolerate the volatility as you end up buying more units when prices are lower.

Unfortunately the volatility is a real problem when you are “selling” on a regular basis. Here you run into the problem of selling a larger portion of the investment when prices drop and you then don’t benefit to the same extent when prices rise.

Agreed past performance is interesting but other factors need to be considered. For instance what is the ‘real’ cost to you and how does it impact on your return? An area that still needs more clarity & attention in many investments!!

I find it interesting that not much is written about the NOT NEEDED cost of investing via a LISP that can skim up to 2% p.a. of one’s returns. Although a nice to have it just turns out very expensive if it costs more than a lot of active mangers are charging for management. Each layer of fees need to be looked at.

If you even vaguely understand what this article is about, you have probably taken the time to educate yourself on investing. Let me give you advice, you are selling yourself short. You are more than capable of getting a cheap online broker and investing in stocks direct. Cut these middle men/women, freeloading BEE supporting “fund managing” losers out.

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