What are “Rolling Returns”?

Rolling returns are a measure of investment performance that’s calculated based on historical data gathered over a specific time frame. They are also known as “rolling period returns” or “rolling time periods”. It is widely used by both investment professionals and retail investors, as rolling returns tell investors how their holdings performed during specified periods. While calendar year returns show performance only for the specific year and annual returns show data for the last twelve months, rolling returns can be applied for longer (or shorter) periods, for example, three year, five year, or 10-year rolling returns. For longer periods, the data is normally represented as an annualized number.

Key Learning Points

  • Rolling return is a measure of investment performance that normally takes into account larger sets of data compared to annual return, which considers only the last twelve months’ performance.
  • It factors in all sources of financial gain generated by an investment, such as capital appreciation, reinvested dividends, and interest distributions.
  • It is a popular measure both among professional and individual investors, and rolling returns are particularly useful in offering a comprehensive picture of performance over the longer
  • However, there are also limitations in this method of calculating performance as it does not reflect the distribution of returns or how skewed the data is.

How Do Rolling Returns Work?

Rolling returns are typically applied over longer time periods (three, five, ten or more years), and are useful in comparing the performance of different investments, for example mutual funds or ETFs. Asset managers also use rolling returns on product factsheets to inform investors of the portfolio’s performance against its benchmark and peer group.

How to calculate rolling returns

The rolling returns formula is quite simple; add the returns from each calendar year during the desired period (3 years, 5 years, etc) and divide the sum by the number of years.

For example, if the ABC Fund had returned 6% from March 1, 2021 to February 28,  2022, the fund had a one-year rolling return of 6%. But let’s say the previous two years had annual returns of 2% and 13%. Using the formula above, the three-year rolling return is 7% per annum (6+2+13/3 = 7) Therefore, investors earned an average 7% return on their investment in any of these years, including compounding and re-invested income.

Rolling returns vs annualized returns

The limitation of rolling returns is that the calculation creates a smoothing effect and does not show how the return was distributed. In the example above, there was a significant difference (11%) in returns that is not indicated by the rolling return. With performance presented in annualized terms, the investor has an accurate picture of performance in each year of the period in question.

Rolling returns vs trailing returns

Trailing returns are calculated for a specific period – let’s say 5 years.  As an example, say that the NAV of the ABC Fund today is $20 per share. Five years ago, at the beginning of the period, the NAV was $15 per share. The trailing return for the five-year period is calculated by adding the NAVs and dividing the sum by the beginning NAV. Then multiply by 100 for the percentage value. (20-15)/15 * 100 =33.33%. The 5-year trailing return of 33.33% is the return for the period but this figure offers no information about the NAVs price volatility over the five years. Performance toward the end of the period can also have a significant impact on the return.

Enroll on our online portfolio performance course to further explore rolling returns and portfolio performance, this course also covers portfolio theory, investment exposure, measures, benchmarks, analysis and behavioral factors.

The Bottom Line

A rolling returns chart, also a common component in fund marketing materials, can show an investor every inflation-adjusted compound return over a specified period. Rolling returns offer a good overall perspective on historical returns, but cannot be used as a source for forecasting forward-looking performance. Rolling returns don’t consider risk in any form (for example standard deviation or maximum drawdowns), making it difficult to know what to expect in the future. However, it is the preferred method for performance reporting and gives a much broader picture compared to single-period trailing returns. Investors can slice and dice funds’ rolling returns in a variety of ways depending on what they want to see, for example a past trend during a particular market or event.