How to properly assess a mutual fund’s performance? First, compare investment returns on an absolute basis. Then, on a relative basis versus historic results, risk-adjusted returns, fund peers, and customized index benchmarks.
All that and more in Episode 32 on the Wilson Wealth Management YouTube channel.
“What absolute returns should I analyze?”
We review gross versus net returns. Annualized versus cumulative. Total versus change in net asset value.
How you should focus on longer term results, rather than one year returns.
For a refresher on investment returns, in general, please refer to “Common Investment Returns”, “Assessing Investment Returns”, and “Investment Returns Are Not All Equal”.
If you prefer listening over reading, please try “Episode 8: Investment Returns” and “Episode 9: Comparing Investment Returns”.
“What about relative returns?”
Yes, investment returns should also be compared against benchmarks. By comparing actual results against different variables, it helps ensure that you cover all angles in your analysis.
You can compare actual return versus the fund’s historic results. Are there trends or changes from past performance? What has led to any variances? New fund management? Good (or bad) investment strategies or tactics? Fund costs?
You can analyze fund results on a risk-adjusted basis. Comparing against zero, real, and risk-free rates of return. Or factoring in risk-adjusted return ratios, such as Sharpe, Sortino, and Treynor ratios.
For more on risk-adjusted comparisons, please read “Common Portfolio Benchmarks”.
You can assess the fund versus its peers. How does the fund ranks in its investment category (e.g., Canadian bonds, US small-cap, consumer discretionary equities)?
For more on peer comparisons, please read “Review Peer Performance”.
Finally, benchmarks can be created to assess performance. With over 3 million indices available, investors can easily develop bespoke benchmarks to assess investment funds and portfolios.
For a review of benchmark indices, please read “Relevant Index Benchmarks”.
As you can see, there are many ways to assess a mutual fund’s investment results. On its own, as well as against relevant benchmarks. For additional information on this topic, please refer to “Mutual Funds: Performance” and “Mutual Funds: Performance is Relative”.
