Case study: A case of changing style and impressive factsheet performance

23 Sep 2013 
SOURCE: Wilfred Ling
My client told me that he like a particular fund because it had been performing very well. A check with the fund's factsheet showed an impressive performance. But I found something different as compared to other factsheets. Usually a factsheet only show a few years of performance in its graph. But for this one, it showed the performance since 1994. I decided to investigate. From 1994 to 2013, the performance of the fund is as shown below. The red line is the fund's index. Click on the chart to see a larger version. Impressive right?

I decided to plot a 3 years rolling return graph as shown below. Click on the chart to see a larger version. It became very clear to me what happened.

This fund was incepted in 1994. From 1994 to 1998, the fund did similar as the index. This is indicated in the area I labelled as 'A'. From 1998 to 2004, the fund did extremely well outperforming its index by a large margin. Concindently this is during the Asia financial crisis and technology bubble . I labelled this region as 'B". From 2004 to 2008, the fund underperforms its own benchmark. I labelled this as 'C'. During this period, equity experienced quite a spectacular bull run with many retail investors and financial advisrs thinking they were expert in investing because anything you invest also make money. From 2008 and onwards the fund simply tracks the index. In fact, I run the numbers for the most recent 156 weeks (or 3 years) and found that based on weekly returns, the fund's beta was 0.95 and alpha 0.49. This means it is tracking very closely with the index. Moreover, based on 36 months return (3 years also) the correlation with the index is 0.99. I suspect it is using enhanced indexing to get the 'extra' outperform over the index and it is not likely it is relying on stock picking anymore.

As it can be seen that a fund can change in its 'characteristics'. The large returns seen in the factsheet is past glory. While I do not advocate daily monitoring but it is important to check occasionally that the fund has not lost its characteristics. This is another reason why one should not buy and hold blindly. See a related article on: Don't buy and hold blindly forever.

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