Here is a question to test your investment knowledge:
Over 6 months when stock markets have been volatile investment fund A has lost 4.73%. Over the same period fund B lost 2.38% and Fund C made 5.96%. Of the 3 funds, one is Absolute Return (AR), one is Asia focused and one is an ethical global fund. Guess which is which. All data is from FT Analytics and the funds are all mainstream retail collective funds.
Normal investment convention says that the Asian or ethical funds ought to be most volatile and the absolute return fund will offer some protection is volatile times. Most advisers would tell you that adding an ethical filter increases risk.
So perhaps you would have guessed Fund A was Ethical, B was Asian and C was the AR fund.
You would score 1 out of 3. B was indeed Asian The best performer was the ethical fund and the disaster was an AR fund.
Over a more realistic assessment period of 5 years the Asian fund did best, the ethical global fund pretty well and the AR fund just about kept up with deposit returns, although it did well enough until about 3 years ago after which it fell apart.
What this shows is that using past performance data on volatility or performance as a sole or main tool (alone or in a combination) in assessing risk or choosing funds is plain stupid. It is useful data but it needs to be contextualised. Above all one needs to remember that the point we are at now is almost always going to be a different financial climate than 5 years ago and probably 3 years ago.
A fund that for a particular reason goes up steadily over several years will have low volatility and good performance but might be well into bubble territory, for example.
Many published fund pick lists and even model portfolios use “risk rated’ returns where the risk element is calculated with statistical volatility and past performance numbers as major factors. That is not a good idea in NotHarry’s opinion! See the article about risk here for a longer explanation
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