Rolling Returns: A Better Way to Measure Performance

When evaluating fund performance, it is common practice to review results for the most recent year (often the calendar year) along with its related longer-term trailing periods.

However, a calendar-year return is not necessarily any more or less important to consider than any other 12-month period (or related trailing period) during a manager’s tenure.

It is also true that few investors buy mutual funds on New Year’s Eve and then sell exactly three (or five or 10) years later. Of course, the reality is that trailing returns ending last month or last quarter are the most commonly available and easily comparable results, so these otherwise arbitrary periods drive investor decisions and flows.

Keeping in mind that investors will buy and sell at any time throughout any given year, we think it makes sense to examine performance over a larger series of dates.

Rolling returns offer a more effective measure because they offer such an accurate and in-depth picture of a portfolio’s performance.

Rather than point-in-time results anchored by the end of the month or quarter, rolling returns account for the fact that investors typically did not invest at the beginning of the current three- or five-year period but instead are in fact investing over many periods.

So instead of assuming that an investment was made on January 1, three-year rolling returns calculate all of the three-year periods starting not only in January but also in February, March, April, etc.

Likewise, a five-year rolling return accounts for all of the five-year returns beginning at a given inception date and advancing one month sequentially. This method allows an investor to evaluate the consistency of a fund’s performance over timeincluding the ups and downs of market cycles, which are an important test of a manager’s skill.

Rolling returns provide a particularly robust analytical tool for evaluating manager performance, especially during volatile periods when simply shifting the performance date range one or two months in either direction can paint a very different picture.

Select a fund below to view 10-year rolling returns for our Featured Funds.

Each point on the chart represents a coordinate showing the Fund’s performance and the index performance for the same period.

Royce Featured Funds vs. The Benchmark 1