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Be wary of looking at a fund’s benchmark, which is often considered a performance target, and how the fund performs in relation to this benchmark. Some fund managers give themselves easy targets. Others charge for active management but are doing little more than matching the benchmark.
And then there are fund managers who don’t pay much attention to the benchmark and its components. They choose, instead, to look for undervalued shares that are likely to rebound – a strategy that can produce excellent returns.
Fiona Jeffery, a smart young business analyst with private asset management firm Allan Gray, offers some pointers in this blog written for Biznews. She reminds us that a fund’s track record is not a guarantee about future performance. – JC
Analysing unit trust fund performance
By Fiona Jeffery
When analysing the performance of a unit trust, one way is to consider the total return a fund has generated, also known as the absolute return. Another way is to look at how a fund has performed compared to its benchmark, or its relative return. It is also useful to drill a bit deeper into the composition of a fund to understand both contributors to and detractors from performance.
- Analysing unit trust fund performance: Talented young analyst, Fiona Jeffery of Allan Gray, shares some pointers.
Absolute share attribution looks at a certain time period to see how various shares contributed to the return over that period, while relative share attribution illustrates how the selection of shares performed compared with an equity index such as the FTSE/JSE All Share Index, commonly called the ALSI.
Understanding the benchmark
Benchmarks are used to assess performance but in some cases, the composition of the benchmark plays no role in the positioning of funds.
Our portfolio managers use a bottom-up approach when selecting shares, looking for companies they believe are priced below their fair value. They are not constrained by the benchmark. An example of this is Richemont, the second biggest share in the ALSI index. While most of our funds may not include Richemont, it doesn’t mean our portfolio managers and analysts don’t take time researching and thinking about stocks like this. Including or excluding a share is a considered decision.
Unlike with large global indices, the top 10 shares of the ALSI currently represent almost 60% of the index. Looking at the FTSE World Index, the largest 10 constituents represent just over 8% of the index.
Global managers have a much larger variety of shares to choose from. The returns of the individual constituents of the benchmark therefore are an important aspect in understanding the drivers of performance for our market. Likewise, the benchmark is useful in evaluating returns (as part of an attribution analysis) as relative performance is shaped just as much by the shares that are not held in a fund, as by the shares that are held.
Attribution methods differ
The methods described above are not the only way a fund manager can perform an attribution analysis. It is important to bear in mind that one method is not necessarily more correct than another and that different types of attributions serve different purposes.
Attributions also become more complicated when there are more moving parts and this will often depend on whether the fund invests in different countries and currencies. Ultimately, all these methods have one common goal – to better understand how the performance of a particular fund has been achieved over a given time frame.
By analysing performance, portfolio managers are able to gauge successes and mistakes made. This goes hand in hand with the knowledge that, in the face of a constantly changing investment environment, past performance is not a guarantee of future returns.
* Fiona Jeffery is a business analyst at Allan Gray.
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