Averages in financial markets can be highly misleading, with even the highest-performing funds showing significant volatility and variance in their best and worst months, according to Australian Fund Monitors (AFM).
“There’s an old saying regarding averages: ‘When your head is in the freezer, and your toes are in the oven, your temperature is average’,” AFM chief executive Chris Gosselin told InvestorDaily.
“So it is with managed funds, particularly with actively managed funds, as index tracking funds for instance track the ASX 200 or other indices. The reality of course the index is an average, in the case of the ASX 200 made up of 200 stocks each of which perform significantly differently to produce the average or index return.”
Behind the averages lies a “massive disposition or distribution of returns” of the individual funds, with AFM data on Australian Long Short funds (including equity market neutral and 130/30 funds) showing that the performance over 12 months to the end of September ranged from -50 per cent through to +30 per cent.
“However, even the headline returns of individual funds can be misleading – or at least need to be investigated as shown by the results for best and worst month,” Mr Gosselin said.
“While there are a number of other key performance indicators that need to be looked at such as volatility and Sharpe ratio, and up-and-down capture, the best and worst month can give a good indication. Risk and return vary from investor to investor and whilst all investors are seeking a good return, many are also wanting to do so without excess volatility or risk.”
Mr Gosselin also noted that the majority of Long Short funds – which are generally considered to be more risky and volatile than the market – have outperformed the ASX 200 accumulation index, which has fallen 10 per cent over the 12 months to September.
