We know past performance is not a guide to future returns but an analysis of a fund's performance can be one indicator of how well the fund has been run to date, writes Chris Jones. To do this well, however, many more measures and data points are required
Despite the limitations of recent past performance, if an investor tries to find out anything about his or her investment on the internet, this is pretty much what they will find.
Whether it is numbers, graphs or ‘Best Buy' lists, it is pretty much the same information and for some years it has been mutually reassuring and self-congratulatory: it has all gone up, so why look any further?
From a customer outcome perspective there are a number of problems with unit price returns.
Firstly, what happened to the unit price yesterday has a very big impact on so many headlines and the more analytical measurements - see table below.
Also, with all the new costs and disclosure requirements, it can be confusing as to what has already been included in the returns and what has not.
What is more, beyond unit encashment for platform and advice fees, if a client is spending their investment by encashing units each month the relationship between unit price performance and client outcome is noticeably de-coupled - see table to the right.
Indeed, on the question of fair comparison (COBS 4.5A.7 44(3)) whether it is quartile ranking, numerical or graphical, comparing returns to things that are taking far more or far less risk (eg MSCI World or Cash) is misleading. Comparing them to their sector favours those who use all the available risk in a bull market and vice versa in a bear market. A relevant risk-based benchmark is required.
What is more, the easy availability of the performance information sometimes results in it being considered in advance of suitability.
Rather than agreeing the clients risk profile, preferences and characteristics, and then analysing the relative performance of the funds that are compatible, there can be pressure to pick the top-performing funds and retrofit the client to its characteristics.
We may be entering into more difficult investment conditions and clients are being presented with the actual value - and change in value of their investments - at least annually.
In the resulting difficult conversations, recent past performance, tables, charts, rankings and measures may become more of a hindrance than a help.
If more focus is put on the compatibility of the solution to client risk tolerance, preferences and characteristics, what they will actually be invested in, and why and how the solution will be managed, rather than recent past performance, the client will have a better understanding of the investment and what to expect.
Trying to use recent performance data to predict out performance could be setting you up for a fall.
Chris Jones is proposition director at Dynamic Planner
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