A great source of information, detail and marketing can be found through an investment funds fact sheet. These are brief documents outlining a funds mandate, returns, risk metrics, holdings and allocations. They are a great resource to use when looking to invest in a particular fund. Recently, we have updated our model portfolio reports with more detailed information for investors who follow the portfolios. Along with monthly industry allocations and a performance chart, we also have various metrics that help outline the risks of the funds. These can be useful in determining if the fund meets your risk tolerance but are also useless if the investor does not understand what they mean. We wanted to take some time to outline what some of these metrics actually say and point out a few more you might see when looking at a fund fact sheet. 

Maximum Drawdown: This measures the peak to trough decline in a stock or fund until a new high is achieved. It is important to remember, the fund could rise to a level still lower than the initial peak then fall to a new low. The new low would be what the peak to trough is calculated from. It is not until a new high is established that the peak is ‘reset’. One could think of this metric as saying: “If I had the absolute worst timing, what is the most I would have lost in the past?”

Profitable/losing periods: This is a fairly straightforward metric that tells an investor what percent of the time a fund was in positive territory for a period and negative territory over a period. The two should add up to 100%. 

Upside/Downside Capture Ratio: This metric looks at how a fund performed during a period when the benchmark was positive (upside capture) and how the fund performed during a period when the benchmark was negative (downside capture). The perfect fund would have upside capture of greater than one and down side capture of less than one.  In other words, the fund would make more in an up market and lose less in a down market. This metric can become particularly useful when looking at a funds mandate. If the fund claims to ‘manage risk on the downside’ or offer low volatility yet show a downside capture of one or more, there may be something worth a closer look.

Upside/Downside Semi-Variance: We are now getting a bit more statistical in nature. To understand semi variance we should first know what variance is. Variance measures the spread of numbers around the mean. More specifically, it is the average of the squared differences from the mean.  So upside/downside semi-variance is simply a measure of the dispersion of numbers below the mean (downside) and the measure of dispersion of numbers above the mean (upside). The usual criticism of these measures is that they only take into account half of the data. Looking at both upside and downside can give a better picture of the risks. If you hear someone referring to downside risk, they are more than likely referring to downside semi-variance or semi-deviation as it looks at volatility of an asset when it is below the mean. The more risk averse an investor, the lower the semi-variance they would likely want.

Upside/Downside Semi-Deviation: Put simply, semi-deviation is the square root of semi-variance. Standard deviation can show the likelihood of a range of returns occurring above and below the mean. The downside/upside calculations break these returns into amounts above and below the mean. A high downside deviation would mean more risk while a high upside deviation would mean more return potential.

Keys issues to watch:

1.    Benchmark – This is so important and an often overlooked issue. Admittedly, our growth and income portfolio reports are guilty of this as well but we will be changing it. If the fund in question does not have an appropriate benchmark, then you are comparing apples to oranges. As an example, a small cap fund should not be compared to the TSX 60 as you would be comparing small cap stocks (with different risk/return characteristics) to large-cap ones. When comparing performance and risk metrics, be aware of what benchmark is being used and if it is appropriate.

2.    Time horizon – For anything under a three-year period, investors should be wary when reading into performance metrics too closely. It is not to say that having this data for a period of less than three-years is ‘bad’. It should just be taken with a grain of salt, as the period is too short to offer much statistical value. On the opposite side of the coin, very long periods also need to be examined in case some sort of regime change has occurred making certain historical data points no longer useful. Maybe a manager changed or there was a style shift twenty years ago. Regardless, more historical data is usually better.

3.    Active weights/performance – Many fact sheets will provide ‘active’ data that shows how the fund compared to the benchmark and is usually expressed as simply the difference between the fund and the benchmark for whichever metric is being examined. These can be useful with two caveats: First, as mentioned earlier, the benchmark needs to be appropriate for this to have any real value. Second, large (or small) active weights could be good or bad, depending on what you are looking for. If you were hunting for alpha, you would likely want active weights to be materially different from your benchmark. However, if you were just looking for a certain asset exposure, large differences from a benchmark may be unwanted as it strays from the target exposures an investor desires and may lead to more or less risk than targeted.

Many of these ratios can be expanded on and no single metric is ever perfect. It is important to try to look at the whole picture and how the risk relates to what you are looking for in an investment. There can be a lot of data provided in fact sheets with little explanation on what the calculation is or what it means relative to the fund in question, so hopefully this can help provide a starting point for interested readers.