Over-reliance on time frames is a blind spot few see

The first news springs from F&C Investments’ regular Multi-Manager FundWatch survey. It has found that the number of funds delivering top-quartile returns in the past three years in the IMA Sterling Strategic Bond fund sector has rocketed almost overnight.

I wonder if this issue of time frame blind spots has itself fallen into a blind spot

Part of the reason for this, states the report, is that many strategic bond funds came a cropper in 2011 due to investments in Greek bonds that slumped when the nation suffered in the eurozone sovereign debt crisis.

Now we’ve hit 2014 the damaging effects of these holdings have been wiped from the time frame under consideration.

The other story is that the Unicorn UK Income fund has been saved from relegation from the IMA’s UK Equity Income sector by some rather fortunate changes to the levels of yield being delivered in smaller-sized companies.

Funds in the UK Equity Income sector are obliged to deliver a yield that equates to 110 per cent of the yield of companies in the FTSE All-Share index of UK shares in any three-year rolling period.

The Unicorn fund was looking quite likely to fall foul of this rule until recently, but some rather aggressive falls in the price of its smaller-company holdings have meant their yield levels shot up. In effect, the shares’ actual payout levels are much the same but yield calculations have been flattered by the falls in price.

This has led to a bumper year for yield on the fund, which has now hit the sector-yield requirement.

Of course, standard time frames are inescapable – whether they span one year, three years or five years – because, arbitrary as they are, there has to be some standardisation of industry frames of reference.

But the problem is that just considering growth, or income, or any other element of performance analysis over fixed periods like this can lead to blind spots in investors’ decision-making.

Investment Adviser warned about this in March this year, when the market collapse that took place during 2008 and 2009 dropped out of the five-year time frame.

This led to a phenomenon in which the funds that appeared to be the best long-term performers ceased to be those that had protected investors during the market rout and instead became those that had simply been the most bullish during the recovery cycle.

With so much attention now being given to issues such as misleading fund costs, I wonder if this issue of time frame blind spots has itself fallen into a blind spot.

Perhaps the industry’s data providers could take the lead on this matter, providing more dynamic performance readouts that ensure fund buyers always see the fuller picture.

John Kenchington is editor of Investment Adviser