Interpreting the output from most asset managers' marketing departments always takes a little bit of care. Here's a fun little quiz to test your comprehension of some of the typical output generated by these teams.

These questions are much harder than they appear at first sight;

Question 1

Consider the following;

 

1yr

3yr

5yr

7yr

Fund A

13.0%

43.5%

44.2%

82.6%

Benchmark

3.0%

30.8%

31.4%

66.5%


Based on this information, has fund A for the majority of time 

a) done relatively better than its benchmark
b) done relatively worse than its benchmark
c) performed relatively inconsistently
d) none of above

Question 2

 

Consider the chart, has Fund B for the majority of time

a) done relatively better than its benchmark
b) done relatively worse than its benchmark
c) performed relatively inconsistently
d) none of above

 

Answers

Question 1

From the limited information available this is difficult to determine but if you do the maths it is fairly clear that d) is the correct answer. The fund has outperformed in the most recent year. Prior to then it performed in line with the benchmark. The actual annual discrete returns are below

Annual Return

Y1

 

Y2

Y3

 

Y4

Y5

 

Y6

Y7

Fund

13%

20.1%

5.8%

-14.7%

17.8%

12.2%

12.9%

Benchmark

3%

20.1%

5.8%

-14.7%

17.8%

12.2%

12.9%


Question 2

Though d) is very close, the actual answer is b). Despite outperforming heavily in 2009, Fund B has persistently underperformed during all other periods. A single blockbuster year can severely distort long term charts presented this manner.

 

Discrete Annual Returns

Y1

Y2

Y3

Y4

Y5

Y6

Y7

FTSE All Share TR in GB

-29.9

28.8

14.5

-3.5

12.3

20.8

1.2

Fund B

-30.2

49.1

14.0

-4.7

11.0

19.7

0.2


Apologies to those who feel I've been a bit cheesy with these questions. They are tricky and it is so easy to jump to conclusions. Understanding how these quirks can distort your thinking can prove invaluable however.