Why we look at Performance in various Market Conditions

The strength of a fund's performance may vary according to market conditions. This is important to those investors who take a view on how the stock market will move and to those who want the value of their investments protected against a falling market. This also gives an indication of how well the fund fits its sector, for the benefit of those structuring a portfolio based on sector weightings.

Performance in various Market Conditions

The Strength in Various Markets graph differs from the other graphs in that time does not feature on an axis. It shows how the fund performs in different markets.

A Fund's Growth is Plotted Against the Average Growth of Funds in its Sector.

The horizontal axis of the performance in Various Markets graph represents the growth per quarter of the sector average which we use as representative of the market at large; the vertical axis represents the growth of the fund. A black square on the graph represents the growth of the fund plotted against the growth of the sector average during a quarter.

The Average Line

The light dotted line represents the average. If the black square is above the average line, the fund grew by more than the sector average during that quarter. A black square below the average line indicates that the fund performed worse than the sector average during that quarter.

The Trendline

The trendline is the straight line which runs closest to the black squares on the chart. It is a kind of average and is used to estimate how the fund might grow when the sector average grows a certain amount.

Scatter, Correlation and the Significance of the Trendline

The accuracy of the trendline can be judged by how scattered the black squares are around it. The more scatter there is, the less the trendline may be thought of as a reliable estimator - even of the past. In this case the trendline indicates that the fund did not behave in line with other funds in its sector. The correlation figure given is a measurement of how similarly the fund behaves in comparison to the sector as a whole. It takes values between -1 and 1 and the closer its value to 1, the more similarly the fund behaves.

The Slope of the Trendline

If the slope of the trendline is steeper than the average line then the fund has tended to perform better in comparison with the average fund in the quarters when there has been b growth in the market and less well when there has been negative growth. If the slope of the trendline is less steep than the average line then the reverse is true. In this case the fund on the whole managed better performance in comparison to its peers in the quarters where there has been poor growth in the market.

The Intersection of the Trendline

Looking at the value at which the trendline passes through the vertical axis gives an indication of how much we could expect the fund to grow in a quarter when the sector average does not grow based on past experience. This value is given as the intersection number.

Performance in Difficult Market Conditions

The PDMC ranking enables an assessment to be made of how well the fund performed in difficult market conditions - which we define for equities as any month when the FTSE A All Share Index lost more than 3% of its value and for bonds as any month where the FT A British Government All Stock Index lost more than 1% of its value. For each fund on our database, we add together the fund's performance during those negative index months in order to arrive at the cumulative PDMC return. We then compare each fund's cumulative PDMC return to all the other funds in the same sector and rank them from 1 to 10. The top 10% in each sector (ie, those that lost the least value) get a ranking of 10 and the bottom 10% get a ranking of 1.