A consistent fund is one that delivers returns that are above its benchmark almost all the time. Consistency of returns is one of the things smart investors pay attention to when evaluating and choosing investments. After all, of what use is it to invest in a fund that returns 100% in one year but looses 200% the next year.
Why should investors pay attention to performance consistency
Investors should pay attention to how consistent a fund is with regards to generating returns because consistent funds are reliable. In addition to being reliable, when you invest in a consistent fund, you do not worry about or run the risk that the fund will be unable to make up on past poor performances.
In most cases, consistently performing funds are known for slow and steady returns.
They also have low volatility, and low beta and high alpha. It is not, however, easy to uncover such funds because of the difficulty of the calculation involved, but analysts at Quantitative Financial Analytics have identified 4 of such funds. The analysts found these funds by using an independent compilation of monthly returns of all mutual funds in Nigeria and choosing those that have consistently made positive returns over the past 5 years or so.
Here are the consistent funds:
Stanbic IBTC Absolute Fund
The Stanbic IBTC Absolute Fund is the most consistent fund in Nigeria. The fund is a balanced fund with the objective of providing liquidity whilst maintaining low to medium volatility of return over the long term. The Fund invests in fixed income securities.
Quantitative Financial Analytics has been following this fund since 2013, and according to our analysis, the fund has only made a loss in just one month out of the 69 months from January 2013 to October 2018. If that is not being consistent, I do not know what is. In 2013, the fund generated 10.01%, 12.61% in 2014, 13.19% in 2015, 11.59% in 2016 and 18.48% in 2017. So far in 2018, the fund has gathered a YTD return of 12.33%. This means that the fund has generated a total of 78.12% return since 2013.
The fund has a beta of 0.02 and an alpha of 3.1, it has a risk return ratio of 0.3 to 13.99.
FSDH Coral Income Fund
The Coral Income Fund is another consistently performing fund in Nigeria. Launched in June 2006, the Fund is structured to permit a maximum investment of 30% in quoted equities, while the balance is invested in high-quality fixed-income securities and the money market.
The objective of the fund is primarily to achieve capital preservation over the long-term and provide investors with an investment outlet that provides stable but competitive returns in excess of inflation.
Unlike Stanbic IBTC Absolute fund which recorded a negative performance in just one month out of as many as 69 months, Coral Income fund recorded more monthly negative performances, but the fund has been able to maintain its consistency of returns at the end of each year since 2009.
Since 2009, the fund lost in 11 months out of 118 months generating a total of 102.41%. This means that if you had invested N100,000 in 2009, you would have more than doubled your investments by now. Like Stanbic IBTC Absolute fund, the Coral Income fund has a beta of 0.02 and Alpha of 2 as well as a risk return ratio of 1.91 to 11.53. The fund is also a low volatility fund as its volatility, measured with the standard deviation of prices is just 0.25.
Nigeria International Debt Fund
The Nigeria International Debt Fund is yet another fund that has been resilient and consistent in its performance since 2012. The fund which was originally created as a closed ended fund in 1997 was restructured as an open-ended fund in 2010.
The Nigeria International Debt Fund invests in primarily in Federal and State government bonds with objective to reduce risk and offer investment safety while preserving investors’ capital.
Though the Nigeria International Debt Fund recorded 13 monthly negative returns out of 82 months since 2012, it has managed to record positive returns year in year out since then. Within that period, the fund rewarded its investors with a total of 74.39%.
The fund has an Alpha of 1.8, a beta of -0.09 as well as volatility measure of 2.34. the risk return profile of the fund indicates that it has a risk return ratio of 2.59 to 8.25.
Zenith Income Fund
The Zenith Income Fund has been consistent in its performance since 2012 although some of the returns were in single digits. Of the 82 months since 2012, the fund recorded negative returns in only 15, meaning that it generated positive returns 82% of the time.
What These Funds Have in Common
One thing these consistent funds have in common is that they are almost all fixed income funds, they invest predominantly in government securities and money market instruments. Another common feature is that they have low volatility and low to near negative correlation to the broad stock market index. They all have low beta and positive alpha.
What is Beta
Beta is a numeric value that measures the changes in the prices of mutual funds to changes in the overall stock market. It helps investors select between funds with varying risk characteristics. Funds with negative beta or beta that is below one are said to be less risky while those that with beta of above one are riskier. For example, a fund with a beta of 1.5 indicates that the fund is 50% more volatile than the overall stock market. Therefore, given the low beta of these consistently performing funds, they may be ideal for the risk averse.
What is Alpha
Alpha is a measure of the performance of an investment, a mutual fund, in comparison with the benchmark. A positive alpha indicates that the fund or investment outperforms the benchmark. The higher the alpha in positive terms, the more the outperformance. On the other hand, a fund with negative alpha is said to underperform the benchmark index.
Using Alpha and Beta for Investment Decisions
Alpha and beta are potent instruments for investment decision making. Investors generally use alpha and beta measures to judge asset managers’ or individual stocks’ performance. Most investors prefer stocks or mutual funds with higher alpha and low beta stocks.
