UNDERSTANDING FUND PERFORMANCE AND BENCHMARKS

An important element of investment performance is the measurement of that performance. Analysis of performance can be made difficult due to the many different ways investment performance is measured and recorded. It is important therefore, when making comparisons of performance, to ensure that the same methodology and terminology has been applied to the expression of investment performance.

Expressing Return
Rate of return on investments can be expressed in terms of single period, annualised, semi-annualised, quarterly, monthly, and sometimes daily. The most common forms of expressing investment return in relation to unit trust investments are: -

Raw Return
This is the return, which shows the total return achieved by holding the investment over the entire period between buying and selling. The problem with this form of performance measurement is that it makes performance comparison difficult, because there is no time dimension added to the measurement.

Annualised Return
This form of expression is superior to the raw return measurement in that it adds a time dimension to the investment performance measurement. Also, most people are familiar and comfortable with the term and concept: per cent per annum. Most interest rates for deposit and loan products are expressed as rates per annum.

Annualised return shows the average annual return achieved by the investment over the holding period i.e. the average annual return would be 7.13% per annum (or per year) over the 20-year period, or 11.8% (significantly higher) per annum over the 10-year period. This demonstrates that by using a common measurement tool or expression, we are comparing “apples with apples” and thus reduces the confusion surrounding different expressions used. Also, benchmarks like KLCI, the one-year fixed deposit rate, etc. are generally expressed as an annualised return, making comparisons meaningful. Annualised returns are therefore useful tools in attempting to express investment performance.

Use of Performance Tables
Overall performance of unit trust industries and individual unit trust managers is generally summarized in the form of an investment performance table. Performance tables are extremely useful in that they summarise the performance of the whole industry, as well as the performance of various benchmarks and of course, the individual unit trust managers.

Investment performance tables generally look at a number of areas including: -

• Performance over various time periods
• Rankings and quartiles
• Funds under management
• Use of other benchmarks.

Use of Benchmarks
The use of benchmarks when assessing investment performance can be extremely useful. It is an ideal way to compare the performance of a particular investment to a consistent base or standard. The use of benchmarks is, however, generally more sophisticated than simply the cash-earning rate. It is sometimes difficult to choose the most appropriate benchmark against which to compare and analyse investment performance, especially the more complicated unit trust products. For instance, unit trust scheme that invests in shares would tend to use the share market index as a benchmark (e.g. the Bursa Malaysia Berhad’s various indices). Equity funds which are syariah-based, normally adopt the Kuala Lumpur Syariah Index as benchmark. However, benchmarks may also be hybrid in nature i.e. a composition of two or more performance indicators. For instance, a balanced fund may choose to have as its benchmark a 50:50 composition of the KLCI and a 12-month bank fixed deposit rate. An Islamic balanced fund on the other hand would use a composition of the KLSI and Islamic deposit rate. A balanced product with elements of cash, bonds, shares and property would make the selection of a benchmark more difficult.

There are a number of other very important dimensions, which need to be taken into account. Investment returns in isolation of other factors such as consistency and risk can be very misleading. All financial measurement involves a concept known as periodicity. The investors need to look for consistency of performance over a range of time periods. When selecting a unit trust scheme, an investor should be looking for a fund manager who has consistently outperformed the relevant benchmark and their fund manager peers or competitors. The risk elements, which need to be assessed and considered, are the fund manager’s credibility, fund management styles and service risks.