To avoid frustrations, it is essential for investors to be fully aware that the past performance of a fund is no guarantee that the results will be repeated in the future. Even so, historical analysis is a great starting point in the selection process for choosing the most promising investment funds.
The important thing here is that the investor should not be seduced only by the return of the last year or the accumulated since the launch of the fund. Attention should be directed to indicators that reveal the risk that the fund’s shareholders took to reap good results, as well as the fund’s consistency in different economic cycles.
Volatility is, in this analysis, one of the main indicators for showing how much a fund usually fluctuates. So, even with great results, funds with high percentages of volatility can scare those who lose nights of sleep when they see the investment go into the red and don’t have the cold blood to wait for recovery.
Finding out which was the biggest fall suffered by the fund, and how long it took to recover – the so-called “drawdown” – also helps the investor to reflect on how he would act if something similar happened again in a moment of crisis.
Another good way to evaluate a fund is to pay attention to how it behaved in different periods. Here the tip is to evaluate several time “windows”, such as 12, 24 or even 60 months, depending on the risk of the fund. The intention is to identify if the fund’s result is the result of an atypical moment or if it actually fulfills the promised return most of the time.
The longer the history, the better. Looking only at the profitability of the last 12 months is a common mistake made by a novice investor. Often a ‘thesis’ [aposta] of the fund may take time to materialize, or previous positions may not be the best for the future.
Marina Renosto, investor at Blackbird Investimentos
In calm seas, everyone sails well. The difference is when the sea is rough. The good manager is the one who, in the storm, shows all his skill, sails well and comes out better.
Arthur Mesnik, partner and director of operations at the management company Trígono Capital
It is still necessary to assess whether, in the end, it is worth facing the volatility of the fund. That is, if the fund generally delivers a premium that rewards the investor for his or her risks. In this case, the answer comes from the Sharpe ratio, which compares the fund’s return with the yield on risk-free fixed-income securities. The higher the Sharpe score, the greater the return obtained from the risk taken.
So having a high return and low Sharpe means that the investor took a lot of risk to get the fund’s return. When Sharpe is zero, the indication is that the fund normally gives the same return as safe fixed income securities. That is, the investor does not need to go through any stress to reach the same result. If Sharpe is negative, stay tuned. This is a warning that the fund’s yield is even lower than risk-free investments. So it makes no sense to go into it.