Menu Close

Key performance indicators for fund managers

One of the greatest problems facing equity fund managers is convincing investors that business fundamentals are far less volatile than share prices and, at the same time, providing comfort that their manager is invested in the right companies. As prominent fund manager: Li Lu, pointed out; in real life businesses don’t really change by day, by hour, by week by months.  It takes years for them to go up or down and the same is true for actual investment results.

Despite more end savers grasping that equity investment requires a long-term outlook, helped by the teachings of Warren Buffett and by Terry Smith's success on this side of the pond, speculative activity seems if anything greater. Contributory factors are hedge funds, especially quantitative funds that trade on a few factors they change regularly, and the explosion of ETFs that allow investors to take thematic and macro-economic views.

COVID has brought out the worse of this with massive rotations firstly into defensive stocks and out of energy and finance, then into technology stocks and now back into energy and finance and out of defensive and technology. Despite many in our industry  clambering on the ESG band wagon, the US energy sector (mainly oil and gas) is up over 50% in the last 12 months (source MarketWatch: S&P 500 Energy Sector Index, 24 January 2022).

One way of squaring this circle, is to focus on certain key performance indicators (KPIs) at the aggregate portfolio level that demonstrate the fundamental strength, attractiveness and progress of companies held.  Balance sheet leverage, return on invested capital (ROIC) and recent revenue growth respectively provide good indicators for these. For our fund, our ultimate objective is dividend growth and so I would add this to get our set of applicable KPIs.

The TB Chawton Global Equity Income Fund current KPIs reflect low company balance sheet leverage (with a third of holdings net cash), ROIC in the high teens and double digit compound average growth rate of revenue over the last five years.  The five-year compound average growth rate of the aggregate average dividend per share is low-teens and the current yield is over 2%.  Sharp short term fund price moves both up and down will oscillate around these long-term trends.  We would encourage investors to focus on the fact that long term share price returns will converge with future fundamental returns.