Investors should routinely review the performance of their investment in a mutual fund; there are, however, some factors that need to be considered and understood, as regards both the preparation and the use of statistics. The most readily available performance statistics are compiled to generate a’league table’ based upon the value of an investment after given time periods since the date of initially investing a particular sum of money, say 1,000.

The numbers are calculated assuming the initial investment is made at the buying, or offer, price and the number of shares thus acquired are valued at the current selling, or bid, price. To avoid distortions caused by different patterns of income, the numbers are adjusted on the assumption that any income entitlement is reinvested at each date during the period when the fund made an income distribution. This overall approach is cited as being on the basis of ‘offer to bid, income reinvested’.

FundsIn addition to presenting a comprehensive listing, publishers usually group the funds for which they have calculated performance into the categories or sectors specified by the trade association. Care must be exercised when using the resultant tables to evaluate the performance of particular funds by individual investors.

Comparisons are valid only between similar products and for the same period. Comparing the performance over one month of a property fund with the five-year performance of a Japanese equities fund would not provide any meaningful information. Nor is it especially instructive to compare a bond fund with an equity fund, unless one is considering a switch. Similarly, the tables assume that, aside from the reinvestment of income, no other investment is made during the period, whether lump sum or via a regular savings plan. The tables are of limited use therefore to the investor who builds up a holding by making regular contributions.

The important considerations are:

  1. The category or type of the fund – most mutual fund trade associations define performance categories, which are used in magazines that publish statistics. The fund’s investment objectives and/or its chosen asset class will determine which category is appropriate.
  2. The timescale of comparison – typical timescales are one, three and six months, and one, five and ten years. Some managers look only for long-term performance and ignore the short term, and investors need to watch their investments with this in mind.

Which attributes are being compared – attributes include:

  1. capital growth;
  2. net income;
  3. gross income;
  4. capital growth, including reinvested (net or gross) income;
  5. total return.

Inflation – inflation tends to make investment performance look good, especially in graphical form. While it is possible to reduce the apparent effect of inflation by using scaling techniques, investors are better advised to assess real returns – the return after deducting the rate of inflation. Alternatively, or additionally, an index, such as a retail prices index that shows the effect of inflation, can be included in the graph.

Volatility-the calculations present performance between two specific dates but not the extent to which performance has varied during the period defined by those dates. Some agencies now supply a measure of volatility, usually in terms of standard deviation, or will present a simple rating of `high’, ‘medium’ or ‘low’.

Manipulation – statistical techniques can be applied to the data to provide unrepresentative, distorted or misleading information. Advertising standards, it in place, will inhibit the use of any such misrepresentation but investors need to be aware that statistics can be used to prove just about anything.

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Mutual Funds Performance Statistics