Comments on: Understanding risk-adjusted returns

By: Kevin

Kevin — Tue, 22 Sep 2009 18:32:24 +0000

By: Clifford Schoeman

Clifford Schoeman — Tue, 22 Sep 2009 15:01:51 +0000

Hi Larry thanks for the comment. The main aim of the post was to highlight the level of risk associated with a mutual fund’s returns by showing a novice investor a quick method of assessing the volatility of a fund’s returns using standard deviation. It was not intended to imply that we believe that bond funds will perform strongly over the next 3 years. Out of interest, as you highlighted the fact that the next move in interest rates will in all likelihood be higher I had a quick look at how the fund that currently has the best risk-adjusted returns over 3 years (Wells Fargo Adv Short Duration Gov Admin MNSGX) performed during the last period in the US when rates started rising from a very low base. Between June 2004 and July 2006 the Fed increased rates in increments of 0.25% from 1% to 5.25%. During this period the NAV of MNSGX fell from $ 10.16 to $ 9.83 (a drop of 3.25%) but during this period the fund did distribute an income of approximately $ 0 .71 per unit, so not a bad performance for a bond fund in a rising interest rate environment. Finally this bond fund is characterized by having a low modified duration which makes it less sensitive to interest rate changes; in fact what is often the case with short duration bond funds is that the decline in value is more than offset by their yields, which increase as interest rates climb. This appears to have happened with the fund above.

By: Juror

Juror — Tue, 15 Sep 2009 18:34:16 +0000

Thanks, very informative. How does this analysis compare if done at a macro level between different investment classes?

By: Stock_picker

Stock_picker — Tue, 15 Sep 2009 16:00:33 +0000

That’s very well written, I look forward to your next contribution. I’d be interested to know what the bext general equity funds were and what their risk-return numbers were?

By: Larry T

Larry T — Tue, 15 Sep 2009 12:27:45 +0000

I agree, very well written.
However, I have a problem with the eventual conclusion, that Bond Funds produced the best risk/return ratio over the last 3 years. The problem is that, looking forward, bonds are probably far more risky, as if interest rates rise (it’s unlikely that they will fall further), they will lose capital value.

By: Morrison

Morrison — Fri, 11 Sep 2009 13:54:52 +0000

Great article, very informative.
Well done.

By: Fund Investing

Fund Investing — Fri, 11 Sep 2009 11:07:50 +0000

Understanding those risks can help you determine how much leverage you should take, and how often you can take it.