Want a clear, panoramic picture of your investment returns?
Try to analyze Rolling Returns + Trailing Returns
Investors typically research historical returns before investing. When considering an investment in mutual funds, the industry convention is to review average returns before making any decisions to determine the consistency of the fund’s returns.
Websites and mutual fund factsheets commonly show trailing returns. Trailing returns, are point-to-point returns, and are a snapshot of the past. Trailing returns are annualised returns (CAGR) for a particular period of time, typically 1 year, 3 years, 5 years, 10 years, 15 years, 20 years and/or since inception.
Trailing returns are dependent on the date of entry and exit.
Trailing returns measure the earnings during a specified period of time. If an investment or strategy had a good or bad year, that recent performance will impact the trailing return calculation for that period.
However, if you reviewed your earnings for the same time period (i.e., 1-year, 3-years, etc.) by shifting the start date, there could be a very different return outcome.
Analysing Trailing Returns
Let’s look at the trailing returns of the Sensex on two different dates just one year apart.
The difference between Sensex returns is quite vast. One year can make a massive difference in the assessment of Sensex performance (or any fund performance). If you started with an upward trending market on 1st January 2008, the Sensex journey was optimistic, and an investor could get carried away with high historical returns and over-allocate to equity. If we take a look at the returns just one-year later (starting 1st January 2009), the performance journey significantly changed and the true potential of equity is not represented. Point to point, snapshot returns can skew the returns expectations of investors.
|Sensex Trailing Returns: As of January 1, 20081
|Sensex Trailing Returns: As of January 1, 20091
Trailing returns alone may not reflect the real investor sentiment. Investing is a journey and often a volatile journey. Evaluating recent trailing returns alone may not reflect the journey accurately as they may look good on a point-to-point basis but may NOT show the full journey or risk profile of a fund or investment.
To sum up, trailing returns are dependent on the date of entry and exit. In our opinion, instead of assessing trailing returns alone, a more holistic measurement of both trailing returns and rolling returns may prove to be beneficial.
Rolling returns complement trailing returns and may provide a clearer, panoramic picture of a fund’s performance.
Rolling returns calculate returns over a fixed time period based on different start dates and average all those returns over the chosen time horizon. For example, an average five-year rolling return will depict the journey an investor would have had over any five-year period, even if they began investing at various points in time. The investor can differentiate between strong performance and weak performance for a selected time period.
The Sensex Journey: Rolling Returns2
|Sensex Rolling Returns (Lumpsum)
|% Time Returns Negative
|% Times Returns >7%
The above data highlights both the risk and the rewards of equity and the possible range of outcomes that an investor might have incurred throughout the investment journey.
How are rolling returns calculated?
Let’s look at the journey of a random index over the last 10 years starting from 1st January 2010. Let’s analyse the 3-year rolling returns calculated on a monthly basis.
- Assumed start date is 1st January 2010. Since we are calculating the 3-year rolling returns, the first data set for calculation will be from 1st January 2010 to 31st December 2012.
- Since the calculation is done on a monthly basis, the second data point will be calculated from 1st February 2010 to 31st January 2013, and so on.
- The last data point in the calculation will be 1st January 2018 to 31st December 2019.
This gives us 84 data points (12 X 7) of 3-year returns over the last 10 years, which will all be averaged to generate the 3-year rolling return from 1st January 2010 to 31st December 2019. This data can be “sliced and diced” to analyse the risk and returns - the average, minimum, maximum, median, percentage of negative returns, percentage returns lower than 7%, etc. Rolling Returns can be calculated for various time periods as well - 1 year, 5 years, 7 years and 10 years, etc.
The above example is only for general purposes / information to show how rolling returns can be calculated. It is not possible to invest directly in any index or the Sensex. Investors may consider investing in Index Fund/ ETFs.
Though we mostly see the data in terms of trailing returns by fund houses and websites, rolling returns together with trailing returns are becoming more prominent. DSP Mutual Fund assesses rolling returns (as well as trailing returns) over longer-term periods (5 years, 10 years, etc.,) as this data will allow investors to accurately assess long-term fund performance and an entire investment journey of a fund. Let’s take a look at a real world example from the DSP Mutual Fund website.
DSP Tax Saver Fund Rolling Returns as of 30th June, 20203
|% times -ve returns
|% times returns > 7%
Rolling returns analysis together with a trailing return analysis can be done for many mutual fund schemes and used to evaluate performance to determine which funds/schemes are more consistent, have delivered better returns and managed risk better. When comparing mutual funds with each other or even the benchmark, comparing trailing returns alone may give a biased view of fund performance, based only on a particular time period. A scheme’s/fund’s near-term performance has heavy influence on the entire trailing returns. A fund/scheme that may have done well on a point-to-point basis may not have had a consistent journey. A sharp upward or downward movement in recent performance can affect returns across all trailing periods, and may generate an artificially healthy or weak returns profile.
Rolling returns together with trailing returns can provide a clearer, panoramic picture of a fund/scheme’s performance and the overall consistency of a fund/scheme. A fund/scheme with consistent rolling returns over various periods may offer a more predictable snapshot of future returns.
Advantages of Rolling Returns
- Not biased towards any period of time
- Not impacted by near term bull or bear markets
- Facilitates scenarios analysis (worst-case scenarios, best-case scenarios, average, median, etc.)
- Consistent rolling returns over various periods can indicate predictable future returns
- Enables investors accurately assess asset management companies over both bull and bear markets and vis a vis competition
- Rolling returns can be calculated for both lump sum and SIP investments
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