It’s important to understand how your investments are performing, but performance reports aren't always easily understood. With terms like 'annualised returns', 'rolling returns' and 'annual returns' or 'indices', 'attribution' and 'contribution', performance reports can seem confusing. But having a better understanding of how results are reported could help you better appreciate how your investments are really performing, and whether you’re on track to meet your investment objectives. 

Annualised performance and compound annual growth rate

 

When quoted for a time period of more than one year, the returns shown in performance tables or charts are commonly annualised (see Figure 1). It is important to understand that an annualised three-year return of 10% does not mean that the fund has returned 10% over three years. Rather, it means that an investment has returned, on average, about 10% per year for three years. 

 

FIGURE 1: EXAMPLE OF AN ANNUALISED PERFORMANCE TABLE 

 

Annualised performance (AUD after fees) to 31 December 2019  

Period
1 mth
3 mths
6 mths
1 year
3 years
5 years
Since inception
Period
Fund return (%)
1 mth
Fund return (%)

5.2  

3 mths
Fund return (%)

10.4

6 mths
Fund return (%)

20.4 

1 year
Fund return (%)

21.1 

3 years
Fund return (%)

7.4 

5 years
Fund return (%)

3.5 

Since inception
Fund return (%)

11.3

Period
Benchmark return (%)
1 mth
Benchmark return (%)

5.0 

3 mths
Benchmark return (%)

8.9 

6 mths
Benchmark return (%)

17.0 

1 year
Benchmark return (%)

19.6 

3 years
Benchmark return (%)

6.7 

5 years
Benchmark return (%)

1.5 

Since inception
Benchmark return (%)

8.6

Period
Outperformance (%)
1 mth
Outperformance (%)

0.2 

3 mths
Outperformance (%)

1.5 

6 mths
Outperformance (%)

3.4 

1 year
Outperformance (%)

1.5 

3 years
Outperformance (%)

0.7 

5 years
Outperformance (%)

2.0 

Since inception
Outperformance (%)

2.7

Source: Colonial First State. Figures used for illustrative purposes only.

In Figure 2 below, the amount of $1,331 is determined due to the effect of compounding interest on the initial investment over the three years. The 10% per year return is also known as the compound annual growth rate (CAGR). The annualised return, or CAGR, includes the effects of compounding interest and capital growth (that is, the increase in value of your investment over time), and may include the reinvestment of income such as dividends and returns of capital. If this is the case, it should be noted in the relevant performance table in your report. 

 

FIGURE 2: COMPOUND ANNUAL GROWTH RATE
Initial Investment
CAGR
Value after 1 year
CAGR
Value after 2 years
CAGR
Value after 3 years
3-year annualiased return
Initial Investment
$1,000
CAGR
$1,000

x 10% 

Value after 1 year
$1,000

$1,100 

CAGR
$1,000

x 10% 

Value after 2 years
$1,000

$1,210 

CAGR
$1,000

x 10% 

Value after 3 years
$1,000

$1,331 

3-year annualiased return
$1,000

10%

Source: Colonial First State. Figures used for illustrative purposes only. 

 

A three‑year annualised return of 10% doesn't necessarily mean a stock appreciated by 10% every year; rather, the stock has appreciated by 10% per year on average. As shown below, the fund may have two flat years followed by a strong year to average a 10% annualised return over three years.

FIGURE 3: PER ANNUM (PA) RETURN VS 3-YEAR ANNUALISED RETURN 
Initial Investment
pa % return
Value after 1 year
pa % return
Value after 2 years
pa % return
Value after 3 years
3-year annualised return
Initial Investment
$1,000
pa % return
$1,000

0% 

Value after 1 year
$1,000

$1,000 

pa % return
$1,000

0% 

Value after 2 years
$1,000

$1,000 

pa % return
$1,000

33.1% 

Value after 3 years
$1,000

$1,331 

3-year annualised return
$1,000

10%

Source: Colonial First State. Figures used for illustrative purposes only. 

 

This means an annualised return provides no indication as to the fund’s volatility over time. This can be likened to a car journey, where the average speed is 50 km/h. Sometimes the car may be stationary, other times exceeding 50 km/h, to average 50 km/h over the whole journey. Note that according to Australian regulatory guidelines, ’returns for periods of more than one year should be annualised' . That’s why annualised returns are the most common method of reporting in Australia, and should accompany alternative ways of presenting past performance for Australian‑based funds.

Rolling returns 

 

Rolling returns report regular performance, usually monthly or quarterly, over a set period of time – like one, three or five years. For example, a monthly, three‑year rolling return chart would show the three‑year annualised returns every month – that is, from January 2017 to December 2019 or February 2017 to January 2020 and so on. Put simply, using this example, it’s the three-year annualised return (or CAGR) plotted monthly. Reporting rolling returns has the effect of smoothing out any volatility to provide a clearer picture of fund performance over a longer time horizon, which can be useful for investors with longer‑term investment objectives. For example, compare the three-year rolling returns in Figure 4 with the same fund’s monthly returns in Figure 5.

Annual returns

 

Annual (or calendar year) returns show a fund’s performance over any given year. This can show how a fund performed during certain periods in time – for example, the 2020 Coronavirus crash.

 

FIGURE 6: EXAMPLE OF AN ANNUAL PERFORMANCE TABLE

 

Annual performance (AUD after fees) to 31 December 2019

Period
12 mths to 31 Dec '15
12 mths to 31 Dec '16
12 mths to 31 Dec '17
12 mths to 31 Dec '18
12 mths to 31 Dec '19
Period
Fund return (%)
12 mths to 31 Dec '15
Fund return (%)

20.8 

12 mths to 31 Dec '16
Fund return (%)

-10.9 

12 mths to 31 Dec '17
Fund return (%)

31.5 

12 mths to 31 Dec '18
Fund return (%)

56.0 

12 mths to 31 Dec '19
Fund return (%)

-23.0

Period
Benchmark return (%)
12 mths to 31 Dec '15
Benchmark return (%)

13.0 

12 mths to 31 Dec '16
Benchmark return (%)

-17.8 

12 mths to 31 Dec '17
Benchmark return (%)

22.6 

12 mths to 31 Dec '18
Benchmark return (%)

58.9 

12 mths to 31 Dec '19
Benchmark return (%)

-35.4

Period
Outperformance (%)
12 mths to 31 Dec '15
Outperformance (%)

7.8 

12 mths to 31 Dec '16
Outperformance (%)

6.9 

12 mths to 31 Dec '17
Outperformance (%)

8.9 

12 mths to 31 Dec '18
Outperformance (%)

-2.9 

12 mths to 31 Dec '19
Outperformance (%)

12.4

Source: Colonial First State. Figures used for illustrative purposes only. 

 

Unlike annualised returns, annual returns also provide a snapshot of a fund’s volatility. For example, over the 2019 calendar year, the fund returned 20.8% while over the following year, it returned ‑10.9% – a volatile range of 31.7% (see Figure 6 above). As illustrated in Figure 7, when considering annual return performance tables, it is important to remember that a percentage loss is not necessarily equal to a percentage gain. For example, a 50% loss requires a 100% gain to get back to where it started.

FIGURE 7: PERCENTAGE GAIN VS PERCENTAGE LOSS
Initial Investment
pa % return
Value after 1 year
pa % return
Value after 2 years
2-year annualised return
Example 1: A 20% loss followed by a 20% gain
Initial Investment
Example 1: A 20% loss followed by a 20% gain

 $1,000

pa % return
Example 1: A 20% loss followed by a 20% gain

-20% 

Value after 1 year
Example 1: A 20% loss followed by a 20% gain

$800 

pa % return
Example 1: A 20% loss followed by a 20% gain

+20% 

Value after 2 years
Example 1: A 20% loss followed by a 20% gain

$960 

2-year annualised return
Example 1: A 20% loss followed by a 20% gain

-2%

Example 2: A 20% gain followed by a 20% loss
Initial Investment
Example 2: A 20% gain followed by a 20% loss

 $1,000

pa % return
Example 2: A 20% gain followed by a 20% loss

+20% 

Value after 1 year
Example 2: A 20% gain followed by a 20% loss

$1,200 

pa % return
Example 2: A 20% gain followed by a 20% loss

-20% 

Value after 2 years
Example 2: A 20% gain followed by a 20% loss

$960 

2-year annualised return
Example 2: A 20% gain followed by a 20% loss

-2%

Source: Colonial First State. Figures used for illustrative purposes only.

Net returns

 

Funds for everyday retail investors typically quote returns after the cost of fees has been subtracted, referred to as the net return. Over time, the cumulative effect of fees can make a difference to performance. The details of the different types of fees charged on managed funds are available in a fund’s Product Disclosure Statement, or PDS. Please note that for net return figures, all relevant distributions (see below) may be assumed to be reinvested in the fund in exchange for units.

Growth returns and distribution

 

A growth return represents the portion of the total fund return attributed to capital growth in the value of the fund’s investments. Distributions represent the amount of income generated by a fund’s investments over a given time period, which are generally paid to investors as a cash payment (sometimes quarterly or annually) or reinvested in the fund in exchange for units.

Indices

 

An index is a collection of companies (stocks) chosen to represent an investment sector – for example, by size, geography or industry. As seen in Figure 8 below, the S&P/ASX 50 Index comprises the 50 largest companies traded on the Australian Securities Exchange (share market) by market capitalisation (that is, the total number of shares multiplied by the current share price). 

 

There are hundreds of indices covering a wide range of sectors, countries and stock exchanges. Some of the commonly quoted indices include the S&P 500 (the top 500 companies in the United States), the S&P/ASX 200 (the top 200 companies in Australia), the FTSE 100 (the top 100 companies in the United Kingdom) and the MSCI World Index (which represents 1,601 leading companies worldwide). There are also more specialised indices that track specific sectors, such as the HSBC Global Mining Index or the UBS Global Infrastructure & Utilities Index. 

AGL Energy Ltd
AGL Energy Ltd

Mirvac Group

Amcor Plc
Amcor Plc

National Australia Bank Ltd

AMP Ltd
AMP Ltd

Newcrest Mining Ltd

APA Group
APA Group

Oil Search Ltd

Aristocrat Leisure Ltd
Aristocrat Leisure Ltd

Orica Ltd

ASX Ltd Origin
ASX Ltd Origin

Energy Ltd

Aurizon Holdings Ltd
Aurizon Holdings Ltd

Qantas Airways Ltd

Australia and New Zealand Banking Group Ltd
Australia and New Zealand Banking Group Ltd

QBE Insurance Group Ltd

BHP Group Ltd
BHP Group Ltd

Ramsay Health Care Ltd

Brambles Ltd
Brambles Ltd

RIO Tinto Ltd

Caltex Australia Ltd
Caltex Australia Ltd

Santos Ltd

Cochlear Ltd
Cochlear Ltd

Scentre Group

Coles Group Ltd
Coles Group Ltd

Sonic Healthcare Ltd

Commonwealth Bank of Australia
Commonwealth Bank of Australia

SOUTH32 Ltd

Computershare Ltd
Computershare Ltd

Stockland

CSL Ltd
CSL Ltd

Suncorp Group Ltd

Dexus
Dexus

Sydney Airport

Fortescue Metals Group Ltd
Fortescue Metals Group Ltd

Telstra Corporation Ltd

Goodman Group
Goodman Group

Transurban Group

GPT Group
GPT Group

Treasury Wine Estates Ltd

Insurance Australia Group Ltd
Insurance Australia Group Ltd

Vicinity Centres

James Hardie Industries Plc
James Hardie Industries Plc

Wesfarmers Ltd

Lendlease Group
Lendlease Group

Westpac Banking Corporation

Macquarie Group Ltd
Macquarie Group Ltd

Woodside Petroleum Ltd

Medibank Private Ltd
Medibank Private Ltd

Woolworths Group Ltd

As at 1 June 2020

 

Note: Any stocks mentioned are for illustrative purposes only and are not recommendations to you to buy, sell or hold.

Benchmark index

 

A benchmark index is chosen by a fund as a standard against which to measure its performance. A benchmark will typically be made up of similar stocks that the fund can invest in. For example, an Australian share fund’s index may be measured against the S&P/ASX 200 Accumulation Index. There are different kinds of indexes, however. For instance, an accumulation index takes dividends into account and will measure price growth as well as income from dividends. Conversely, a price index does not take dividends into account and will generally measure share price growth only.

Outperformance and underperformance

 

If a fund returns more than the benchmark, it is said to outperform relative to the benchmark. Similarly, if it returns less than the benchmark, it is said to underperform relative to the benchmark. Fees are sometimes charged when a fund outperforms its benchmark by a certain level, which is known as a performance fee. A fund can still outperform relative to the benchmark even if the absolute return (the fund’s performance regardless of the benchmark) is negative. For example, if the fund returns ‑10.0% and the benchmark returns ‑12.0%, the fund would still have outperformed by two percentage points, or 200 basis points (bps). Investment managers can be restricted as to what stocks they can invest in. This can mean that in the event of a market downturn, a manager may hold stocks they think won't fall as much in value to try to outperform the benchmark.

Relative overweight and underweight portfolio holdings

 

As previously mentioned, a benchmark consists of a basket of stocks. The stocks that comprise a benchmark are at different weights, relative to their market capitalisation. For example, BHP comprises about 6.7% of the ASX 200 (as at August 2020). If a fund holds more of a stock than the benchmark does, it is 'overweight' that stock. Conversely, if a fund holds less than the benchmark does, it is 'underweight' that stock. Investment managers seek to outperform the benchmark by being overweight and underweight in certain stocks; they are overweight in the stocks they expect to perform well and are underweight in the stocks they expect could perform poorly.

Rank
Stock name
Closing weight
Rank
1
Stock name
1

CSL Ltd 

Closing weight
1

8.47%

Rank
2
Stock name
2

Commonwealth Bank of Australia

Closing weight
2

7.42%

Rank
3
Stock name
3

BHP Group Ltd 

Closing weight
3

6.9%

Rank
4
Stock name
4

Westpac Banking Corporation 

Closing weight
4

4.11%

Rank
5
Stock name
5

National Australia Bank Ltd

Closing weight
5

3.76%

Rank
6
Stock name
6

Australia and New Zealand Banking Group

Closing weight
6

3.36%

Rank
7
Stock name
7

Wesfarmers Ltd 

Closing weight
7

3.02%

Rank
8
Stock name
8

Fortescue Metals Group Ltd 

Closing weight
8

2.99%

Rank
9
Stock name
9

Woolworths Group Ltd 

Closing weight
9

2.92%

Rank
10
Stock name
10

Macquarie Group Ltd 

Closing weight
10

2.57%

As at 1 June 2020

 

Note: Any stocks mentioned are for illustrative purposes only and are not recommendations for you to buy, sell or hold.

Attribution and contribution

 

The effect on performance of a fund’s overweight or underweight positions is called attribution. This represents the investment manager’s stock-picking skills, as they will adjust their relative holdings in the fund to the stocks they think are likely to underperform or outperform. Below, Figure 11 illustrates the effect that a relative holding to the benchmark has on performance attribution.

Stock holding relative to benchmark weight
Stock performance
Performance attribution
Stock holding relative to benchmark weight
Underweight
Stock performance
Underweight

Underperformed 

Performance attribution
Underweight

Positive

Stock holding relative to benchmark weight
Underweight
Stock performance
Underweight

Outperformed 

Performance attribution
Underweight

Negative

Stock holding relative to benchmark weight
Overweight
Stock performance
Overweight

Outperformed 

Performance attribution
Overweight

Negative

Stock holding relative to benchmark weight
Overweight
Stock performance
Overweight

Underperformed 

Performance attribution
Overweight

Positive

Source: Colonial First State

 

A stock’s effect on the performance of the fund, regardless of whether it is overweight or underweight, is called contribution. This is more representative of individual share price movements rather than any stock-picking skill by investment managers. For example, if a fund holds BHP and BHP’s share price rises, this will have a positive effect on the fund’s absolute return.

Volatility

 

A fund’s volatility measures how much the fund’s returns fluctuate over time, usually measured against a benchmark index. Typically, the more volatile or higher-risk a fund is, the more likely it is to experience price fluctuations over short periods of time. For this reason, volatile funds may be more suitable for long‑term investing to help reduce the risk of short‑term losses of capital. Because of the fluctuations that occur in more volatile funds, it is important to consider longer‑term performance (generally over more than three years) when looking at investment performance, and not focus too heavily on the past month or quarter.

Want more information

 

Colonial First State regularly shares timely market updates and other helpful resources on investing. For more information, speak with a financial adviser. Alternatively, you can contact us on 13 13 36.

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Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and issuer of FirstChoice range of super and pension products. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the responsible entity and issuer of products made available under FirstChoice Investments and FirstChoice Wholesale Investments. 

 

Information on this webpage is provided by AIL and CFSIL. It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the target market determinations (TMD) for our financial products at  https://www.cfs.com.au/tmd which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. You can get the PDS and FSG at www.cfs.com.au or by calling us on 13 13 36.