Page 72 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 3

Comparable calendar periods must be used when
comparing the performances of different funds What is an index?
Where a benchmark is used, the benchmark must
In the financial markets, an
be applied consistently and must be appropriate to index is a calculated value
the particular fund designed to show the trend
(or the average) of a group of securities
Trailing, Rolling, Discreet and CAGR or commodities. A simple stock market
In the ideal world, all performance figures would be index, for example, could be constructed
expressed in a standardised and universal way, making it by averaging all the share prices every
possible to compare rates of return across a range of day. Plotting these averages would
reveal the ‘average’ trend of prices. This
products notwithstanding different fee structures and
would be skewed towards high-priced
investment strategies. Many regulations around shares, however, so more sophisticated
performance reporting are designed to achieve this, but indexes use values weighted by market
advisors and investors still need to be aware that there capitlisation. Indices vary enormously in
are several valid ways of showing investment returns. breadth. The JSE Top 40 index, for
example, is made up of the 40 largest
The methods used by fund managers and web sites
shares on the JSE; the MSCI World
include trailing returns, discrete returns and rolling returns, Index, by contrast, includes over 1 500
all of which could show either total (cumulative) or shares across 23 developed markets.
annualised performance figures where periods are not The FSCA and the Treasury are working
12 months (see Total vs Annual Returns on page 66). All on regulations under the FSR Act to make
have their pros and cons. the provision of an index a financial
Many stats houses, including ProfileData, use service and to ensure the sustainability of
compound annual growth rates (CAGRs) as their main certain critical indices.
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, 41% 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.
Unit trust funds, as part of their mandates, define benchmarks that they consider appropriate
reference points for fund managers and investors. Suitable benchmarks are usually based on
securities or indicators which coincide with the investable universe for the fund. A large cap fund, for
example, might specify the JSE Alsi40 index as a benchmark, and a money market fund the
AlexForbes Short Term Fixed Interest Index (STeFI).

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