[New series] LOOKING UNDER THE HOOD #1 ๐Ÿ”ง ๐Ÿ‘€

18 December 2020



โš ๏ธ When assessing fund performances, the calculation methodology makes a huge difference โš ๏ธ

To calculate the percentage of funds outperforming, SPIVA and Morningstar take into account all funds at the beginning of the selected period.
๐Ÿ”Ž For example, letโ€™s take 100 funds at the beginning of a period. During the entire period, 10 funds survive, and 3 outperform. Morningstar and SPIVA, in their reports, calculate that 3% (3/100) outperform over the period. This implies that 97 funds underperform and yet we only know based on the numbers that 7 underperform.

โœ… Therefore, it is important to know that ๐ญ๐ก๐ž ๐œ๐š๐ฅ๐œ๐ฎ๐ฅ๐š๐ญ๐ž๐ ๐ฉ๐ž๐ซ๐Ÿ๐จ๐ซ๐ฆ๐š๐ง๐œ๐ž๐ฌ ๐š๐ซ๐ž ๐›๐ข๐š๐ฌ๐ž๐ as they are based on the strong ๐š๐ฌ๐ฌ๐ฎ๐ฆ๐ฉ๐ญ๐ข๐จ๐ง that ๐š๐ฅ๐ฅ ๐Ÿ๐ฎ๐ง๐๐ฌ ๐ง๐จ ๐ฅ๐จ๐ง๐ ๐ž๐ซ ๐ข๐ง ๐ž๐ฑ๐ข๐ฌ๐ญ๐ž๐ง๐œ๐ž ๐ฐ๐ž๐ซ๐ž ๐ฅ๐ข๐ช๐ฎ๐ข๐๐š๐ญ๐ž๐ ๐๐ฎ๐ž ๐ญ๐จ ๐ฉ๐จ๐จ๐ซ ๐ฉ๐ž๐ซ๐Ÿ๐จ๐ซ๐ฆ๐š๐ง๐œ๐ž. And yet, in many cases, funds are liquidated for non-performance reasons such as fund mergers, strategy overlap, manager retirement, lack of scale, share class consolidation...

๐Ÿ‘‰Highlighting this information to investors is key for portfolio construction as it can lead to wrong active-passive allocation decisions.

Marlene Hassine Konqui