Performance needs context
Pension fund performance is useful, but only when it is read properly. A fund that looks strong over one period may look average over another. A fund that looks weak over one year may still have a sensible long-term record.
The first step is to compare the same time periods. One-year returns should be compared with one-year returns. Five-year returns should be compared with five-year returns. Mixing periods can make the comparison meaningless.
The second step is to compare similar funds. A high-equity growth fund should not be judged in the same way as a cautious fund designed for lower volatility. If one fund takes much more risk, it may produce higher returns in good markets and larger falls in bad ones.
The third step is to look for consistency. A fund that performs well across several periods may be easier to understand than a fund with one exceptional year and several weak ones. Consistency does not guarantee the future, but it can reveal how the fund has behaved in different conditions.
A simple comparison framework
Use performance as one part of the decision, not the whole decision.
- Compare 1, 3 and 5 year returns where available.
- Check the risk rating and asset mix.
- Look at volatility and drawdowns, not just return.
- Ask whether the fund's objective matches your goal.
- Do not chase a fund only because it recently topped a table.