We believe that rolling returns provide a particularly robust analytical tool for evaluating manager performance, especially during volatile periods when simply shifting the performance date range one or two months in either direction can paint a very different picture.
When evaluating fund performance, it is common practice to review results for the most recent year (often the calendar year) along with its related longer-term trailing periods of three, five, and/or 10 years.
However, a calendar-year return is not necessarily any more or less important to consider than any other 12-month or related trailing period or during a manager’s tenure. It is also true that few investors buy mutual funds on New Year’s Eve and then sell exactly three (or five or 10) years later. Of course, the reality is that trailing returns ending last month or last quarter are the most commonly available and easily comparable results, so these otherwise arbitrary periods drive investor decisions and flows.
Keeping in mind that investors will buy and sell at any time throughout any given year, it makes sense to us to examine performance over a larger series of dates, which we think makes a highly convincing case for rolling returns. Rolling returns offer a more effective measure because they provide an accurate and in-depth picture of a portfolio’s performance. Rather than “point-in-time” results anchored by the end of the month or quarter, rolling returns account for the fact that investors typically did not invest at the beginning of the current three- or five-year period but instead are investing over many periods. So instead of assuming that an investment was made on January 1, three-year rolling returns calculate all of the three-year periods starting not only in January but also in February, March, April, etc. (Likewise, a five-year rolling return accounts for all of the five-year returns beginning at a given inception date and advancing one month sequentially.) This method allows an investor to evaluate the consistency of a fund’s performance over time—including the ups and downs of market cycles, which are an important test of a manager’s skill.
Rolling returns provide a particularly robust analytical tool for evaluating manager performance during volatile periods when simply shifting the performance date range one or two months in either direction can paint a very different picture.
Each point on the chart represents a coordinate showing the Fund’s performance and the index performance for the same period. The distance from the line is the degree of outperformance or underperformance versus the benchmark.
Article by The Royce Funds