Paid for by John Hancock Investment Management®
Financial advisors and their clients may be looking at the same data, but could well be approaching it from very different perspectives. This mismatch can often lead to conversations at cross-purposes, or result in a meeting where a client isn’t fully aware of how a fund or investment is being evaluated. It may also lead clients to place too much emphasis on investment outcomes — as opposed to taking a holistic view of their portfolio performance — and potentially lead them to make premature decisions based on single data points.
One way to counter these conversations is for clients to evaluate investment performance from a rolling returns perspective. Unlike annual returns, which focus on an investment’s portfolio over the course of a single year, rolling returns measure the annualized return of an investment over a specified period (usually several years, ending on different dates) providing a more comprehensive view of the overall investment’s performance. This snapshot can help identify longer-term performance trends and can be a valuable tool for understanding long-term performance assessment. In this fourth article in a four-part series focused on how financial advisors and their clients are building fixed income strategies to optimize portfolios, two accomplished investment professionals from John Hancock Investment Management share how adopting a rolling returns perspective can empower clients to craft a more robust fixed income investment strategy.
Meet the Panelists
Creating process-based conversations
“You can have a great year, and it may have been lucky,” says John Bryson, Head of Investment Consulting, Investment Data Analytics and Education Savings at John Hancock. But clients may be basing investment decisions on that “lucky” year, rather than the underpinning strategy. “You can’t repeat lucky years. You can repeat a good process,” says Bryson, adding that a shift from an outcome-driven strategy to an process-driven strategy is one that may be unfamiliar to clients, requiring education on the part of the financial advisor.
A more realistic snapshot
“When you look at a calendar return, it’s as if a customer bought a certain investment at a set date,” says Justin Clarke, Director of Sales Execution at John Hancock Investment Management. But in reality, a client isn’t always buying into a fund at the end of the quarter or beginning of the month. So those calendar snapshots may not represent a truly accurate assessment of fund performance. On the other hand, rolling returns average out monthly performances, so clients are seeing how the fund is performing month over month, which will be more indicative of client experience over time.
Still, annual returns are the norm and rolling returns require more data analysis and access to data, explains Clarke. But the payoff of shifting to presenting both sets of returns is a more informed client who can make more informed decisions about their investments. But Clarke recognizes that it’s a process. “When you have a new fund or new manager, it’s going to take time to get the data. But the more cases you have that show the rolling months, the better opportunity you have to see differences of historical propensity and magnitude,” he adds.
More stability for long-term assets
Clients who compare annual returns may become more incentivized to jump between funds, notes Clarke, minimizing the impact of their investment. Clarke uses mutual funds as an example. Even though mutual funds by nature are longer-term investments, the average investor holds mutual funds for four or five years. This may be partially due to the information that investors receive, where they may assume their money can be better put to work elsewhere.
In this example, rolling returns can give investors a clearer picture, which can guide them toward creating a more strategic plan for their money. There may even be instances where a fund may have shown negative returns in a calendar year but still post a positive return from a rolling returns perspective. Crucially, rolling returns can show the historical propensity of the fund to beat the index in an annualized period. “For example, if your fund beat the index 86% of the time in a three year period and 92% of the time in a five year period, and your average annual return is one and a half times better than the index, this arms clients with the information they need for an informed decision,” explains Clarke.
Looking beyond a “good” year
A rolling returns perspective can help to optimize overall portfolio performance, but it will require a bit of a psychological shift on the part of the investor. “Good managers more often than not deliver good years. That’s proof they’re good managers,” says Bryson. Rolling returns can also emphasize the why behind performance, and can also help provide context for volatile years. “There will be a point when there’s a bad year, and a client can look at rolling returns and say, ‘yes, it was a bad year, but you’re still a good manager,’” he adds, adding that rolling returns give additional portfolio insight that can be fodder for future strategy conversations. “An advisor can then say, we’re going to show you some strategies that didn’t work this year, but there’s a reason they’re in your portfolio. Rolling returns can help shift the conversation,” he explains.
But this shift in perspective isn’t just a buffer against volatile markets, it’s helping clients shift their own perspective from a short-term, outcome-focused one to a long term one that optimizes the efficacy of the instruments in their portfolio. Clarke says that a consumer analogy can be helpful in assessing fund performance. “Consumers want to buy the best value; something that’s good value that you’ll use over a long period of time. And rolling returns can help provide those answers for investments,” says Clarke.
And it’s this reframing that provides impetus to smartly engage with the markets. “Investments are one of the things most people buy as they get expensive and sell as they get cheap, which is the inverse of what we should do,” says Bryson. Rolling returns help clients see patterns, assess opportunities to buy, and recognize the value of long-term performance. By adding a rolling returns perspective to client conversations, financial advisors can help pave the way for clients to feel more confident and informed, and ultimately allow for the most successful and optimal partnership for long-term portfolio management.
From John Hancock Investment Management:
This article was paid for by John Hancock Investment Management and created by Yahoo Creative Studios. The Yahoo Finance editorial staff did not participate in the creation of this content.
As part of the globally recognized Manulife Investment Management, John Hancock Investment Management brings over a century of financial expertise to the table. Our extensive capabilities span both public and private markets, offering a truly global investment footprint. Our in-house asset management teams are renowned for their world-class capabilities, complemented by specialized expertise across various sectors, providing tailored investment solutions for clients. From market analysis and behavioral finance to practice management and unbiased iInvestment counseling, our value-add resources offer comprehensive support to help financial advisors navigate the complexities of the financial landscape. To learn how John Hancock Investment Management can help you and your clients, visit jhinvestments.com.
This material does not constitute tax, legal, or accounting advice and neither John Hancock nor any of its agents, employees, or registered representatives are in the business of offering such advice. Please consult your personal advisor for information about your individual situation. These views and opinions are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security. Portfolios that have a greater percentage of alternatives may have greater risks.
