Lies, damned lies, and fund performance figures

Fund data can help identify the best investments, but, warns Jenne Mannion, it can also be misleading
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The Independent Online

Fund management companies are all too willing to plaster impressive performance figures all over their advertising campaigns. After all, good fund performance is what entices investors in the first place.

But you do not need to rely on the selective promotions issued by these groups to see how funds are faring. Certainly, they won't be crowing about any funds that are weak performers.

There is a seemingly endless stream of independent fund performance data issued. It seems very dull, but knowing how to measure and interpret this data is important when it comes to choosing new funds or monitoring existing investments.

Performance ultimately measures the return you have made on your investment and shows how well it is doing relative to its competitors. For those considering buying a new fund - whether a unit trust, open-ended investment company (Oeic) or investment trust - performance figures enable you to distinguish between the winners and losers and can help to make your choice easier.

There are several websites and specialist magazines that provide fund performance information. Some specialist investor magazines such as Bloomberg Money, What Investment and Moneywise include a user-friendly list of fund performance data.

These magazines are always a good place to start. You are able to look up individual funds and see how much they have risen or fallen over given time periods in percentage terms, and where they are ranked relative to their peer group.

For the internet-savvy, there is a wealth of information available online, usually accurate to the previous day. Many websites are aimed at the professional investor, but if you know what you are doing, they can provide timely information for private investors. Websites with good sources of performance data include Reuters, Morningstar, TrustNet, Standard & Poor's and Interactive Investor.

For performance-measurement purposes, individual funds are compared against their peer group, or sector. In the UK, these sectors are determined by the Investment Management Association (IMA) and there are 29 in total. For instance, all UK growth funds will be categorised into the UK All Companies sector and UK funds that aim to produce an income will be listed in the Equity Income sector.

There are also individual geographic-based sectors such as North America, Europe, Japan, Global Emerging Markets and the Far East. Additionally, there are separate, individual sectors for smaller companies funds in the UK, Europe, North America and Japan. There are also several different types of sectors for bonds and a further sector, called Specialist, which contains a mismatch of funds focusing on anything from Latin America to healthcare, natural resources, property and financial stocks.

Helen Stephenson, the communications director at the IMA, says the sector categories enable investors to compare like with like. There is no point, for example, comparing the performance of a fund in the UK Corporate Bond sector with one in Global Emerging Markets or UK Equity Income, as all are influenced by different market conditions. You need to compare funds in the same sector, she says.

There are certainly pitfalls to be aware of when looking at performance data and, while it is a useful guide, it should not be the be-all and end-all. The Financial Services Authority (FSA) is keen to stress that past performance is not an indicator of how a fund will perform in the future, and the regulator stipulates that fund providers must include this health warning when advertising their wares.

Mark Dampier, an independent financial adviser at Hargreaves Lansdown, says one of the pitfalls in looking at performance data is that people look at too short a period. He believes performance data should be compared over at least five years, which is a good reflection of a manager's ability to perform.

And what you see is not necessarily what you get. A fund may carry a performance track-record which is not the work of the current fund manager. If there has been a change of manager on a fund, that fund will still carry the longer-term track-record of the predecessor.

This can work two ways. For instance, the fund manager of a top performing fund may leave their company, resulting in a new fund manager being appointed. The fund's track record will still look impressive - thereby enticing new investors - even though the manager who achieved that good performance is no longer responsible.

Alternatively, a good manager may be appointed to a fund where the track-record is terrible, meaning investors may be shunning the fund unnecessarily. Dampier cites Artemis Global Growth as an example. For many years, this was a very weak-performing fund. However, in December 2003, a new fund manager, Peter Saacke, took the helm. Saacke is also manager of Artemis's European Growth fund and has proved his skill at identifying good shares in this market. Therefore, many advisers are confident about this fund within the Global Growth sector, based on the manager, but the five-year performance figures are hardly enticing.

To get around the fact that fund managers change jobs quite frequently, the financial website Citywire (www.Citywire.co.uk) has developed a system which tracks the performance of fund managers rather than the funds. Even if a fund manager changes jobs, they still have their track reco rd over certain time periods. You must subscribe to Citywire to see the ratings of all the managers, but the top 10 fund managers in all key sectors (24 in total) are available free of charge. You can also see Citywire's top 10 managers over various periods of time.

Stephenson points out that, even though a fund manager may have delivered good performance over a longer period, indicating they are good at their job, this is not a guarantee that the fund will continue to do well, even if that same person continues managing the fund. A number of things may happen - it may be as simple as their style going out of favour.

Finally, Dampier warns that investors should not be swayed by performance alone, whether based on an individual fund or a broader sector. Investors have had their fingers burnt by doing this in the past.

A prime example of investors chasing a well-performing sector occurred in 2000, when technology funds were delivering stunning performance and investors piled in. However when the technology, media and telecoms bubble burst, these funds came crashing down and now, five years later, the sector is still woefully 67.9 per cent lower than five years ago, according to figures provided by TrustNet.

Navigating the websites

* Interactive Investor ( www.iii.co.uk) is aimed at the private investors rather than professionals and is very user friendly. It will require you to register, and there is a bounty of information once you have done so. After clicking on funds, then funds search in the left hand column, you can choose a sector opt to see performance over whichever time period you want, and there are a number of filters to refine your search. Such a search would show you that funds with holdings in pharmaceutical companies (pictured) are currently performing poorly, but this does not mean they will continue to do so.

* Websites aimed at professional investors, can be useful tools for private investors too. Start with Reuters ( www.reuters.co.uk) then click on funds in the left hand column, followed by funds search. You can then choose the sector that you want to analyse. It is important, however, to click on the IMA button at the top. By doing this you will omit those funds that are based offshore.

* See also TrustNet ( www.trustnet.co.uk), also known as Financial Express. It is easy to look up data from investment trusts, as well as unit trusts and Oeics. Performance data is available over several time periods, and you can sort these as you wish. There are other useful tools on this site, such as fundamental details of individual funds.

* Morningstar ( www.morningstar.co.uk) is also user-friendly. By clicking on fund selector in the left hand column you can end up with a range of tools to use. Again, in the overview section, search by IMA sector. You will be given periods of shorter performance, from as short as one day. You can graph performance in several ways.

What performance jargon means

* Discrete performance: When performance is considered over a longer period but each year is considered at an individual level. In the past, providers would advertise periods of performance that made them look good, whether it was one year, three, five or 10 years. Now, they must advertise five years of discrete figures if advertising performance at all.

* Quartile: In some instances, funds will be broadly categorised as to what quartile they fit into within the performance league table. Therefore, if there are 100 funds in a sector, the best 25 over a certain time period would be said to be in the top quartile.

* Basis: Performance figures can vary according to whether you have accounted for initial charges or not. "Offer to bid" means that the figures are after initial charges and annual management fees, while "bid to bid" means that initial fees have not been taken into account, but annual management fees have. "Mid to mid" is used for Oeics and investment trusts.

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