How to measure a fund

Wednesday, Apr 16 2014 by

Buying something, whether it’s a car a carpet or a company, is a tricky process. It involves quantifying the asset being purchased, such as number of seats, size or profits, and then forming a judgement on the value of those properties. It may include a premium for branding or possibly a discount for damaged goods. In the end the buyer takes a view on the asset to be purchased and agrees a value for the transaction based on the most appropriate measure

One area though where it is hard to find a relevant measure is in collective investment vehicles. The back pages of financial magazines are full of endless tables of past performance. We all know, and the FCA takes great care to keep reminding us, that past performance is no guide to future returns.

The reason is simple.

Investment performance is a complex blend of returns of the asset class, security selection, leverage, use of financial instruments and cost. It might be interesting to know that Ocado has been the best performing share in the UK market over the last twelve months but not everyone wants to invest a significant part of their portfolio into a business that has never made any money and may never do. Funds that were lucky enough to have a holding in it did well despite its high valuation. Conversely, funds that did not want to pay too much for an unproven business suffered.

Many investors are now attracted by the apparent simplicity and low costs of exchange traded funds (ETFs) that claim to replicate the returns of a designated index. However, digging out the exact composition of their portfolios can be time consuming and surprising. Holding a futures contract on a constituent of an index is not the same as holding the security itself.

History tells us that overpaying for any asset is more likely than not to result in weaker returns in future years. While that can be relatively easy to make a judgement on value for a single stock like Ocado it is more difficult for a fund that may have over hundreds of shares in it.

Collective investments maybe like elephants. Everyone knows what they are even if they might struggle to describe them. Trying to measure them is even worse.

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Past performance is not a guide to future returns. The value of investments and the income from them may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. For risks relating to specific products, please refer to the relevant documentation for that product.

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Ocado Group plc is a United Kingdom-based online grocery retailer. The Company's principal activities are grocery retailing and the development and monetization of Intellectual Property (IP) and technology used for the online retailing, logistics and distribution of grocery and consumer goods, derived from the United Kingdom. The Company offers end-to-end operating solution for online grocery retail based on technology and IP, suitable for operating its own retail business and those of its commercial partners. The Company's brands include Ocado, Ocado Smart Platform, Sizzle, Fetch and Fabled. Sizzle is a kitchen and dining store. The Company's Ocado Smart Platform is a solution for operating online retail businesses. The Company's Ocado Smart Platform combines its end-to-end software and technology systems with its physical fulfilment asset solution. more »

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