Contextualising Return of Investment

ASSET BUBBLES - LOOKING OUT FOR THE RED FLAGS

Contextualising Return of Investment 

The word “return” in general terms is a measure of profit generated over a period of time on an invested amount. The concept of return can sometimes be confusing because of the varying measures that can be used to compute return. This article seeks to identify the popular measures of return and how to apply them in evaluating investment performance and in making apple-to-apple comparisons

Relative Return: Relative return is an important measure of return because it provides a reasonable basis for measuring/comparing the performance of actively managed funds or investment managers. 

A question that is often asked is: how does an investor or analyst determine if a Fund Manager is doing a good job or note? A Fund Manger’s performance should be judged relative to peers and the state of economy e.g. a gain of 3% in a bull market (market where stocks are generally performing well) may be considered poor if peer Fund Managers are recording gains of 10% conversely a 1% gain in a bear market (market where stocks are generally performing poorly) is good where compared to peer fund managers making losses of 6%. Therefore, an absolute return figure of 10% does not say much; for this figure to be meaningful it must be evaluated in the context of current market conditions and relative to peers.
 

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