Assessing fund performance during bull markets, when most investments are thriving, can be as critical as evaluating during downturns. It's during these periods of market exuberance that investors must discern the truly exceptional funds from those simply riding the upward wave. This guide outlines strategies to effectively evaluate fund performance in surging markets.
EXAMINE RELATIVE PERFORMANCE
Benchmark comparison: The first step is comparing the fund's performance against a relevant benchmark. A fund should not only perform well but also outperform its benchmark to prove its worth. This indicates that the fund manager is making smart investment choices beyond the general market's upward trend.
Peer group analysis: Comparing the fund's performance with that of its peers offers valuable insights. This analysis can highlight how the fund stacks up against similar funds. Look for funds that consistently rank in the top quartile of their category.
ASSESS THE FUND'S CONTRIBUTION TO RETURNS
Attribution analysis: This involves breaking down the sources of the fund's returns. Determine whether the performance is due to the fund manager's selection of specific sectors, stocks or other assets. A fund that outperforms due to a diversified strategy and smart picks, rather than heavy reliance on a few high-flying stocks, may be more sustainable.
Active share: For actively managed funds, examine the active share, which measures how much the fund's holdings differ from the benchmark. A higher active share indicates the manager is taking distinct positions, which can be a positive sign if accompanied by superior performance.
LOOK BEYOND THE NUMBERS
Fund manager strategy: Understanding the fund manager's strategy is crucial. A strategy that yields high returns in a bull market may carry higher risks. Assess whether the strategy is sustainable and aligned with your investment goals.
Risk management: Investigate how the fund manages risk. Even in bull markets, effective risk management is a sign of prudent management. It's essential for protecting gains when market conditions eventually change.
Sustainability of performance: Consider the sustainability of the fund's performance. Analyse the fund's historical performance across different market cycles. Funds that perform well in both bull and bear markets may offer a more reliable long-term investment.
EVALUATE COSTS
Impact of fees: In bull markets, high returns can mask the impact of high fees. However, fees can significantly reduce your net returns over time. Compare the fund's expense ratio to its peers and consider whether the fund's performance justifies its costs.
STRATEGIES FOR INVESTORS
Maintain diversification: Even in a bull market, diversification remains key. Ensure your portfolio includes funds that can perform well across various market conditions.
Review and rebalance: Regularly review your investment portfolio to ensure it aligns with your long-term financial goals. Rebalancing may be necessary to maintain your desired risk level, especially after significant market gains.
Keep a long-term perspective: It's easy to get caught up in short-term gains during bull markets. However, a long-term perspective is vital. Consistent outperformance, aligned investment strategy and effective risk management are more indicative of a fund's potential for long-term success.
Evaluating fund performance in bull markets requires a comprehensive approach that goes beyond surface-level returns. By focusing on relative performance, the sustainability of returns and effective risk management, investors can identify funds that are truly exceptional, offering potential for solid returns even when market conditions change.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.