- Sometimes the cost of procuring fund data can be prohibitively expensive
- Popular sites show how funds perform against rivals but not their benchmarks
- There are ways around this, you just need to know where to look
Whether it be truly understanding an investment process or studying a manager's take on markets, picking a fund can be difficult and time-consuming. But just as all this is worth getting right, so too is tracking progress after investing.
Monitoring performance is especially important, given that many active funds can end up struggling against both the market and their peers. However, keeping tabs on fund returns can be harder and more nuanced than we might expect.
Unearthing the data
An issue that IC readers commonly raise is just how hard it is to find fund performance data in the first place. In the past, a handful of publications regularly listed fund returns over a variety of time periods. But many of these publications have since closed, and the cost of procuring such data is often prohibitively expensive.
The Investors' Chronicle website features free markets data pages where users can look up a fund of their choosing. The pages come with a charting tool to show how a portfolio has performed over different time periods (from standard timeframes such as five years to a bespoke period). Our data pages also show how returns compare with the average fund in the relevant Morningstar category, the return a fund would have made from a £1,000 investment over a given period, and other metrics such as a fund's information ratio (see below).
Useful as this is, one thing this service doesn't show is how a fund has fared versus the relevant underlying market. The Morningstar sector groupings, meanwhile, can be very broad, and average returns only give a rough sense of how funds operating in the same area might have fared.
In practice, an investor wanting to assess the performance of the Fundsmith Equity (GB00B4Q5X527) T accumulation share class can see how it has fared versus Morningstar's Global Large-Cap Growth Equity category over standard timeframes, how many funds sat in that category and the quartile (relative to peers) in which Fundsmith landed over the different periods.
What the site doesn't show is how the fund has fared versus the MSCI World index over those periods.
Similarly, sites such as Trustnet also provide free fund performance data and will compare a fund versus its relevant peer group (in Fundsmith's case, the Investment Association Global sector), but not versus the index.
Investment platforms can fill this gap, with the likes of Hargreaves Lansdown allowing users to add a relevant index to the performance page for a given fund. These can then be compared on a chart, and the numbers are also set out in tables showing how the fund and index compare over standard time periods and 12-month periods.
Platforms also provide some performance analysis for their customers, for example by showing the return achieved since they first invested. A problem here is that the figures can sometimes be skewed by the money being invested at different times.
Some useful tools are also available to those who favour investment trusts: the Association of Investment Companies' website shows performance figures and allows users to compare different trusts in the same sector, for example. It also shows share price discounts and, via its income finder tool, the volume of dividend payouts generated from different holdings.
IC readers often use their own methods to stay on top of fund and portfolio performance. Investors who wrote to us in 2022 noted that they monitored performance using their own spreadsheets, logging investment decisions and comparing returns with a selected benchmark. Naturally, approaches differ, and some are relatively time-consuming: to give just one example, one reader works out the profit and loss from each holding, including the dividend received, once a year.
What to look for
Investors considering ways to assess a fund should start by recalling why they bought it in the first place and asking if it still fulfils the role. Clearly, these roles can vary significantly: those who bought a portfolio such as Scottish Mortgage (SMT) are likely to hope that it continues to generate chunky long-term returns by betting on the major trends of the future, while shareholders in one of the wealth preservation trusts will trust that such funds can protect them from the worst of a market sell-off.
Other funds might simply be expected to generate a decent dividend, even if they fail to do much on the capital growth front.
Whatever the goal, investors will still want to check that the fund is performing well versus a relevant index and its peers. Even regularly cited time periods can be misleading when taken in isolation, however. A fund's five-year returns can be overly skewed by an especially good or bad year, for example.
To return to the example cited above, the share price total returns generated by Scottish Mortgage illustrate this point well. Shareholders have seen a 60 per cent return over the five years to 29 April, comfortably outpacing the 28.7 per cent average for the AIC Global sector. But these impressive numbers mask a great deal of volatility, with investors having enjoyed an enormous 110.5 per cent gain in 2020 but taken a 45.7 per cent loss in 2022. As such, the point at which a shareholder had invested would have had a huge impact on returns, albeit regular investing would smooth out some of these ups and downs.
With this in mind, investors should firstly assess fund returns over each of the standard periods given on factsheets and platforms: one, three and five years.
It can also be useful to look at returns over discrete calendar years, how the fund compares versus the relevant index and sector here, and what might explain bouts of unusual performance.
Growth funds tended to struggle quite badly in 2022 amid the rise in interest rates, for example, while the concentrated nature of returns in global and US markets last year made it difficult for many active funds to keep up.
Other details are also worth bearing in mind. The investment manager or team behind a given fund can often change, and it makes sense to consistently track a single team's returns rather than combining two different management records over a set time period. More sophisticated investors can also turn to metrics that seek to put an investment manager's performance in context. The information ratio set out on our data pages (found in the Risk Measures tables under the Risk tab) shows the extent to which a fund manager has delivered excess returns, but also takes into account the level of risk taken to do so. A ratio of 0.4 or higher tends to indicate a decent level of manager skill in this regard.
