Understanding Rolling Returns- A Comprehensive Guide

Category: Economics

What Are Rolling Returns?

Rolling returns, often referred to as "rolling period returns" or "rolling time periods," represent the annualized average returns for a designated period that ends in a specific year. These statistics are invaluable for investors aiming to analyze historical performance over varying investment periods, thus mirroring the real-world experiences of investors over time.

Key Takeaways

The Purpose of Rolling Returns

One primary objective of rolling returns is to highlight the volatility—both the peaks and valleys—of an investment's performance over time. By analyzing rolling returns, investors can avoid being misled by short-term data, which may not accurately reflect a fund's or portfolio's performance trajectory.

For instance, consider a five-year rolling return for the year 2015. This figure encompasses the annualized returns from January 1, 2011, through December 31, 2015. Conversely, the five-year rolling return for 2016 would include the returns from January 1, 2012, to December 31, 2016.

Smoothing Performance

A rolling return approach offers insights beyond a static annualized return figure. For example, an investment may exhibit a 9% annualized return over a decade. However, the returns during those years may have varied widely—jumping 35% in one year and dipping 17% in another. A rolling return analysis allows you to capture each year's return dynamics, providing a nuanced view of the investment's performance during specific intervals.

Types of Rolling Returns

Trailing 12 Months (TTM) Returns

One of the most widely used rolling return measures is Trailing 12 Months (TTM) returns. This metric captures the financial performance of an investment or company over the past 12 months, providing a more timely analysis than year-end or fiscal-year metrics. The TTM method aids analysts and investors in assessing the most current financial data, enabling them to make informed decisions based on recent performance.

Importance of Trailing 12 Months

TTM analyses effectively neutralize the effects of seasonality, filtering out the noise created by fluctuations in demand, unexpected expenses, or temporary cash flow changes. While it may not pinpoint short-term trends, TTM data becomes indispensable for long-term forecasting and evaluation of key performance indicators (KPIs) like revenue growth, margins, and working capital management.

Practical Applications of TTM

  1. Corporate Financial Planning: Companies use TTM figures to obtain up-to-the-minute insights into their financial health, guiding decisions on resource allocation and investment strategies.
  2. Investment Analysis: Analysts utilize trailing figures to create a clearer understanding of a company's recent performance, essential for making investment recommendations.
  3. Risk Assessment: By examining TTM data, investors can better judge the consistency and reliability of a company's performance, which is crucial for assessing risk.

Real-World Application: General Electric (GE)

To illustrate the TTM calculation, consider General Electric (GE). In Q1 2020, GE realized revenues of $20.5 billion, a significant drop from the $27 billion recorded in Q1 2019. For a complete overview of the past year's performance, one would take GE's total revenue from 2019, $95 billion, subtract the Q1 2019 revenue, and then add the revenues from Q1 2020. This would arrive at a TTM revenue figure of $88.5 billion.

Conclusion

Rolling returns serve as a vital tool for investors and analysts seeking to understand the dynamics of investment performance over time. By focusing on annualized average returns across multiple periods, rolling returns provide a clearer picture of how investments behave under different market conditions. Moreover, the Trailing 12 Months metrics enable a contemporary evaluation of financial health, essential for strategic decision-making and effective investment management. With this comprehensive understanding of rolling returns, investors can make better-informed decisions about their portfolios, focusing on long-term growth rather than short-term fluctuations.