Page 76 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 3

of more technical issues which impact on investment
performance and how it is presented. These include: What is an index?
Performance figures may be presented as absolute
In the financial markets, an
returns, average annual returns (compounded or index is a calculated value
not), or even rolling annual returns designed to show the trend
The costs associated with unit trust investment (or the average) of a group of securities
may be either included or excluded (although the or commodities. A simple stock market
industry standard is NAV-to-NAV figures) index, for example, could be constructed
by averaging all the share prices every
Lump sum and monthly investments require
day. Plotting these averages would
different treatment to enable fair “like with like”
comparisons reveal the ‘average’ trend of prices. This
would be skewed towards high-priced
Different methods for calculating the reinvestment shares, however, so more sophisticated
of dividends and interest may be used indexes use values weighted by market
Comparable calendar periods must be used when capitlisation. Indices vary enormously in
comparing the performances of different funds breadth. The JSE Top40 index, for
example, is made up of the 40 largest
Where a benchmark is used, the benchmark must
shares on the JSE; the MSCI World
be applied consistently and must be appropriate to Index, by contrast, includes over1650
the particular fund
shares across 22 developed markets.
Trailing, Rolling, Discreet and CAGR
In the ideal world, all performance figures would be expressed in a standardised and universal
way, making it possible to compare rates of return across a range of products notwithstanding
different fee structures and investing strategies. Many regulations around performance reporting
are designed to achieve this, but advisors and investors still need to be aware that there are several
valid ways of showing investment returns.
The methods used by fund managers and web sites include trailing returns, discrete returns and
rolling returns, all of which could show either total (cumulative) or annualised performance figures
where periods are not 12 months (see Total vs Annual Returns on page 70). All have their pros and cons.
Many stats houses, including ProfileData, use compound annual growth rates (CAGRs) as their
main performance metric, mainly because these are comparable across a wide range of scenarios. It
also makes rates of return somewhat comparable to interest rates on risk-free products.
For lump sum investments, CAGR is compounded annually (and is therefore comparable to the
effective annual rate for fixed interest products). For monthly annuity performance figures, we
report an annual growth rate compounded monthly (this is logical where contributions are made
monthly). In other words, a performance figure of 10% achieved via a monthly debit into an equity
fund means that, to get the same return, an investor needed an interest rate of 10% per annum
(paid monthly in arrears).
Absolute returns are harder to compare across different scenarios (eg, where calendar periods
are not the same). For example, imagine adverts from two different funds, the one reporting 70%
growth over 5 years, the other 41% growth over 3 years. It’s not immediately obvious which did
better. Using CAGR we see that the 70% growth is the equivalent of 11.2% a year, 40% the
equivalent of 12.1%, making it clear which fund performed better on an annualised basis.
(Of course, this comparison is not fair because the time periods are different, but it illustrates why
CAGR can be easier to interpret.)
To illustrate the relationship between the different performance tables that are encountered
online, chart 3.7 shows trailing, discrete and rolling returns calculated over three years for the
same fund.

Benchmarks
A benchmark is a standard or point of reference against which something can be judged. In
the collective investments industry, typical benchmarks are stock indices, sector averages,
inflation and interest rates.

74 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts