Case 037Products and fund selectionWarm up
Two funds show 3-year returns of 22% and 14% on their factsheets, but their rolling 3-year returns tell a different story. Read the numbers and say what the rolling returns show.
1The situation
A client brings two factsheets. Uditaya Flexi Cap Fund shows a 3-year return of 22% a year; Neelgagan Value Fund shows 14% a year. Both funds are invented, and both have 12 years of history. The client wants to switch everything to Uditaya.
You pull each fund's calendar-year returns and compute every 3-year window, ten per fund. Uditaya's yearly returns, oldest first: -8%, +4%, +30%, -12%, +6%, +9%, -5%, +8%, -4%, +26%, +20%, +20%. Neelgagan's: +16%, +10%, +18%, +4%, +17%, +15%, +9%, +19%, +13%, +16%, +12%, +14%.
2Your task
What do the rolling 3-year returns show that the factsheet number does not, and what would you tell the client?
Quick check
In how many of the ten 3-year windows did Uditaya beat 10% a year?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The 22% is Uditaya's best window, not its typical one. Across all ten 3-year windows its median is 6.3% and only two beat 10%. Neelgagan's median is 13.6%, all ten windows beat 10%, and its worst window, 10.5%, is above Uditaya's median. Over the full 12 years Neelgagan compounded at 13.5% against 7.0%. One end date flattered Uditaya.
Step 1Why can one 3-year number mislead?
A cricketer's average from his last three innings tells you about three innings. A point-to-point return depends heavily on where the window starts and ends; a strong final stretch can make an ordinary fund look like the best in its category. Uditaya's last three years were +26%, +20% and +20%, which is where the 22% comes from. The nine years before that are invisible on the factsheet.
Step 2What do the rolling returns show?
A rolling returnThe return over a fixed-length window, calculated for every possible start date, so you see the whole range of outcomes an investor would have had. computes the 3-year figure for every start year, so you see what an investor would have got whichever year they started. Uditaya's windows run from -0.5% to 22.0% with a median of 6.3%; Neelgagan's run from 10.5% to 16.0% with a median of 13.6%. A client who bought Uditaya in almost any year before the last two earned less than 10% a year over the next three.
| Measure | Uditaya Flexi Cap | Neelgagan Value |
|---|---|---|
| Factsheet 3-year return | 22.0% | 14.0% |
| Median rolling 3-year return | 6.3% | 13.6% |
| Worst 3-year window | -0.5% | 10.5% |
| Windows above 10% | 2 of 10 | 10 of 10 |
| 12-year return a year | 7.0% | 13.5% |
Step 3What do you tell the client?
Show him the chart before the conclusion, so he sees it rather than takes your word. Uditaya has had a very good three years after nine weak ones; Neelgagan has been steadily good; switching everything now would buy the fund's best stretch after it has happened. Then say the limit: rolling returns describe the past too. Before any switch, look at why Uditaya improved: a new manager, a changed style or a lucky sector bet would each mean something different.
Where candidates lose it
The common miss is comparing the two factsheet numbers and stopping, which is exactly what the client did. The interviewer wants you to ask for more of the history before judging.
The second is concluding that Neelgagan will keep beating Uditaya. Rolling returns show consistency so far; they do not forecast. Say that plainly.
What the interviewer asks next
- What would rolling 1-year returns add, and what would they hide?
- How would you check whether Uditaya's recent run came from a manager change?
- Why do fund houses usually show point-to-point returns on factsheets?
Company names and figures are illustrative.