What it means
Reporting monthly returns as a list of percentages is accurate but hard to take in. The VAMI turns that list into a running account balance, starting at a round figure, usually 1,000, and growing or shrinking each month by that month's return.
Because each month's return is applied to the running total, the index shows compounding, which is the effect of earning returns on earlier returns. A fund that gains 10% and then loses 10% does not return to its starting level, and the VAMI line shows that clearly.
Fund managers and investors use it to compare track records on a common basis. Two funds with different starting dates can both be rebased to 1,000 and plotted on one chart, which helps spot which one grew faster or suffered deeper falls.
The index also makes drawdowns easy to read. A drawdown is the fall from a previous peak to a later trough, and on a VAMI chart it appears as a visible dip that can be measured against the earlier high.
The main nuance is that VAMI is built from reported returns and normally after fees, so its quality depends on the quality of the data. It also says nothing about risk on its own, so it should be read together with measures such as volatility.
The index is also easy to rebuild from raw data in a spreadsheet. List the monthly returns in a column, add one to each, and multiply down the column from the 1,000 starting level, which gives an independent check on any chart a manager supplies.
In practice
Real-world examples.
Example
A hedge fund puts a VAMI chart in its investor presentation, starting at 1,000 and ending at 2,350 after eight years. Investors see the growth path and the dip during a difficult year. They use it as a quick view before reading the detailed statistics, and the manager is asked to explain the fall.
Example
A pension fund consultant compares three managers by plotting their VAMI lines from the same starting month. One manager's line is steady, another rises faster but falls sharply in a bad year. The consultant uses the chart to explain the trade-off to trustees, who prefer to see the shape of the journey as well as the end point.
Example
An analyst building a due diligence report converts a list of 60 monthly returns to a VAMI series. She finds the index fell from 1,520 to 1,310 in one stretch. That is a drawdown of 210 / 1,520, which is about 13.8%.
Formula
Calculation
VAMI at the end of a month = VAMI at the end of the previous month x (1 + Monthly return)
The starting level is conventionally 1,000. A fund reports monthly returns of +2%, minus 1% and +3% over three months. After month one, VAMI = 1,000 x 1.02 = 1,020. After month two, VAMI = 1,020 x 0.99 = 1,009.80. After month three, VAMI = 1,009.80 x 1.03 = 1,040.09 (rounded). The cumulative gain is 1,040.09 - 1,000 = 40.09, or about 4.01%, which is a little less than the 4% you would get by simply adding 2, minus 1 and 3.Case study
Seen in the real world.
This illustrative case is about a fictional fund, Orchard Lane Capital, which sent investors a table of monthly returns each quarter. Many investors found the table hard to interpret and asked how the fund had done overall.
The operations team added a VAMI chart to the report, starting at 1,000 and showing the fund and a benchmark on the same axes. For the first time, investors could see that the fund had trailed the benchmark for two years before overtaking it, and that a sharp fall in one month had been recovered within five months.
Questions from investors became more specific and better informed, and the number of enquiries asking for explanations fell. The fictional fund kept the chart in every later report.
Watch out
Common mistakes.
- Adding monthly returns instead of compounding them. Simple addition overstates or understates the true result, and the VAMI must multiply each month's growth factor.
- Treating the starting level as meaningful. The 1,000 is only a convention, and what matters is the percentage change from it.
- Judging a fund by its VAMI alone. The chart shows growth but not the risk taken to achieve it.
Questions
People also ask.
What does the name VAMI stand for?
It stands for Value Added Monthly Index.
Why start at 1,000 rather than 100?
It is a convention that mirrors the idea of $1,000 invested, though some presentations use 100, and the shape of the line is the same.
Are the returns in a VAMI before or after fees?
It depends on the source, so check whether the underlying returns are net of fees before comparing funds.
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