Page 71 - Profile's Unit Trusts & Collective Investments - March 2025

Costs and Pricing

Performance Statistics
Most investors consider good investment What is an index?
performance (a good rate of return) the sine qua non of In the financial markets, an
investing in a CIS. This seems too obvious to mention, index is a calculated value
but in fact the definition of “good performance” is not designed to show the trend (or
entirely clear. theaverage)ofagroupofsecuritiesor
commodities. A simple stock market index,
If “good performance” means, say, top quartile for example, could be constructed by
performance, then over what period? Or does it mean averaging all the share prices every day.
consistent performance over any range of time periods? Plotting these averages would reveal the
Or does it mean tax efficient performance (which is ‘average’ trend of prices. This would be
affected by the mix of capital gain vs income in the total skewed towards high-priced shares,
return)? Or does it just mean a superior performance to however, so more sophisticated indexes
an appropriate benchmark? And then there’s the question use values weighted by market
of risk – surely good performance must be achieved at an capitalisation.Indicesvaryenormouslyin
acceptable level of risk? What about inflation – surely breadth. The JSE Top 40 index, for
performance figures are meaningless unless they take example, is made up of the 40 largest
inflation into account? shares on the JSE; the MSCI World Index,
by contrast, includes around 1 400 shares
Measuring and comparing “investment performance” is across 23 developed markets.
not as simple as it seems. In addition to the question of The FSCA and the Treasury are working on
which standard you measure against, there are also a number regulations under the FSR Act to make the
of more technical issues which impact on investment provision of an index a financial service
performance and how it is presented. These include: and to ensure the sustainability of certain
Performance figures may be presented as absolute critical indices.
returns, average annual returns (compounded or
not), or even rolling annual returns
The costs associated with unit trust investment may be either included or excluded
(although the industry standard is NAV-to-NAV figures)
Lump sum and monthly investments require different treatment to enable fair “like with like”
comparisons
Different methods for calculating the reinvestment of dividends and interest may be used
Comparable calendar periods must be used when comparing the performances of different
funds
Where a benchmark is used, the benchmark must be applied consistently and must be
appropriate to the particular fund

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 investment strategies. Many regulations around performance reporting
are designed to achieve this, but advisers 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 66). 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

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 69