FEATURE: FUND PERFORMANCE
Managing
expectations
There is a big gap between a fund’s total return
and an investor’s actual profi t, because
individuals and their advisers often buy into a
fund at the wrong time. Christopher Traulsen,
CFA, believes fi rms will win more business if
they are more open with investors
BY: CHRISTOPHER TRAULSEN, CFA
ll of us are familiar with the advisers tend to buy into strong
A
EXECUTIVE SUMMARY
standard total return performing funds after they have
calculation used to display experienced good performance and sell
• Investors often buy high and sell low.
performance for investment after poor performance. Put diff erently,
• Riskier funds exacerbate the problem.
funds. If, for example, a fund earns an they buy high and sell low, signifi cantly
• Firms must be open about a fund’s
annualised 12.4% over fi ve years, and its changing their experience with the
risks.
benchmark or relevant peer group fund(s) in question. Th e tendency is
returns less than that, it is apparent that natural – investors want the affi rmation even if it means attributing meaning to
the manager has added value. But who of buying off erings that have performed small patterns where there may be none.
actually earns that 12.4%? Th e measure well in the past and most lack the Th e net eff ect is that investors may
assumes investors bought and held the information to ascertain if that have much poorer investment
fund throughout the entire period in performance can be sustained in the experiences with a given asset
OPELNITSKY
question. Th is may be true for some, but future. Behavioural fi nance might manager’s funds than the stated
we know that it is not true for many. attribute it to the tendency all of us performance of the off ering. Th is
© IGOR K
Evidence suggests that investors and have to try to impose order on chaos, matters greatly to the investor,
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 25
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