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How to evaluate a fund's performance

20 November 2024

Put a fund’s performance into perspective by examining benchmarks, risk-adjusted returns, fees, peer comparisons and qualitative factors like management and fund size.

Investing in funds requires diligent research and ongoing evaluation to ensure you're choosing the right ones for your portfolio. Evaluating a fund's performance is a crucial step in this process. This guide outlines key factors to consider when assessing a fund's performance, helping investors make informed decisions.

 

UNDERSTAND PERFORMANCE BENCHMARKS

When evaluating a fund's performance, it's important to compare it against appropriate benchmarks. A benchmark is typically a market index that reflects the sectors or investment style the fund aims to mirror. For example, a UK equity fund might be compared against the FTSE All Share index while a global fund might be benchmarked against the MSCI AC World. This comparison gives investors a clearer view of how well the fund manager is achieving the fund's investment objectives relative to the broader market.

 

ANALYSE HISTORICAL PERFORMANCE

While past performance is not a reliable indicator of future returns, it provides valuable insights into the fund's volatility and potential for returns over time. Investors should look at a fund's performance over various periods, such as one, three and five years as well as calendar year, discrete and rolling returns, to understand its consistency and resilience during different market conditions.

 

COMPARE WITH PEER GROUP PERFORMANCE

Evaluating a fund's performance relative to its sector or peer group provides a broader context of its effectiveness. Funds with similar investment objectives and strategies can serve as a benchmark for comparison. By examining how a fund performs against its peers, investors can gauge whether it is an industry leader or lagging behind. It's also useful to look at rankings and ratings provided by independent research firms. Consistently strong performance within its peer group can indicate a fund’s competitive advantage and effective management, whereas consistent underperformance might signal potential issues or inefficiencies that warrant further investigation.

 

CONSIDER RISK-ADJUSTED RETURNS

Evaluating a fund solely based on its returns without considering the risk taken to achieve those returns can be misleading. Risk-adjusted return metrics, such as the Sharpe ratio, help investors understand how much return a fund has generated per unit of risk. A higher Sharpe ratio indicates a more favourable risk-return profile, making it an essential tool for comparing funds with similar objectives but different risk levels.

 

EXAMINE FEES AND COSTS

The costs associated with investing in a fund, including management fees and operational expenses, can significantly impact your investment returns over time. A fund with higher fees needs to perform significantly better than a lower-cost alternative to justify the extra cost. Therefore, evaluating the fund's expense ratio and comparing it with peers is crucial when assessing a fund's overall attractiveness.

 

REVIEW FUND MANAGER AND STRATEGY

The fund manager's expertise and investment strategy play a critical role in a fund's performance. Research the fund manager's track record, experience and approach to selecting investments. A consistent and transparent investment strategy that aligns with the investor’s financial goals and risk tolerance is more likely to deliver satisfactory results over the long term.

 

LOOK BEYOND THE NUMBERS

While quantitative factors like returns, benchmarks and fees are critical, qualitative aspects should not be overlooked. The fund's size, investor base and the asset manager's reputation can all influence a fund's performance and stability. Larger funds may benefit from economies of scale but might also face challenges in quickly adapting to market changes. Conversely, smaller funds might be more nimble but could have higher expense ratios due to lower asset bases.

 

MONITOR REGULARLY

Investing in funds is not a set-it-and-forget-it endeavour. Regular monitoring and evaluation ensure that the fund continues to meet your investment objectives and performs in line with expectations. Changes in the fund's management team, strategy shifts or consistent underperformance compared to benchmarks might prompt a review of the investment case.

 

 

This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.