The Edge of the Performance Horizon
by Charles Cheng, CFA
As we approach the ten-year anniversary of the worst parts of the global financial crisis, one of the more basic tasks for individual investors is becoming more complicated- analyzing the track records of investment funds.
Typically, fund comparisons, whether against benchmarks or other funds are done over a fixed period such as three or five years. The problem is that such a limited time is not enough to understand the fund’s performance over different market and economic conditions.
通常情況下，對於不同基金的比較，無論是參照各種基準 (benchmark) 還是與其他基金比較都是在一段固定的時間內進行的，例如三年或五年。問題是，如此有限的時間不足以了解基金在不同市場和經濟條件下的表現。
Source: Fidelity Investments
Different types of sectors and companies could perform differently during various stages of the business cycle. Therefore funds that are predisposed toward certain types of stocks may perform better in the short term in certain market environments but not necessarily through the whole cycle. Historically, the time between major world recessions has been roughly 8 years, plus or minus a few years. The popular fund rating service, Morningstar, bases their star rating methodology on blends of time horizons of over three, five, or ten year periods depending on what is available.
The most recent cycle is at the upper end of that range, with the previous market top before the financial crisis in October 2007 and the market reaching a bottom in March 2009. A three-year track record would show markets trending in only one direction, while a five year track record features a huge disparity in performance between the US market and Emerging Markets, and technology stocks versus other sectors. While this may be in large part due to secular rather than cyclical trends, it is also true that managers predisposed to companies in certain styles and sectors will have benefitted, something that may not have happened in a different economic environment.
In another year, assuming there is not yet another major recession, the trailing ten year record will feature only the recovery period from the 2007-2008 crisis. Considering this, here are some things investors can keep in mind to make their fund comparisons more relevant:
Mr. Cheng is a managing partner at Clarity Investment Partners, a Hong Kong based independent private investment office.