What Are Rolling Returns?

What Are Rolling Returns?

Let me explain rolling returns to you directly—they're also called rolling period returns, and they give you a smoothed annualized average of returns over multiple periods, all ending in a specific year. As an investor, you need these metrics because they provide critical insights into performance trends by cutting through short-term fluctuations. Instead of just looking at isolated periods, rolling returns offer a full view of a fund or portfolio's performance over time, which helps you make better decisions by showing historical performance in a more reliable way.

Key Takeaways

You should know that rolling returns show you an investment's average annual performance over specific time periods, smoothing out short-term volatility. When you analyze them, you understand how returns fluctuate over different intervals, giving you a clearer picture than a single-period snapshot. A common measure is the trailing 12 months (TTM), which covers financial performance over the last 12 months. By using rolling returns, you can uncover periods of strong and weak performance, which provides valuable insights for your long-term investment decisions.

Analyzing the Mechanics of Rolling Returns

One main goal of rolling returns is to show you the frequency and magnitude of an investment's stronger and poorer performance periods. They give you better insight into a fund's full return history without being skewed by the latest data, like the most recent month or quarter-end.

For instance, the five-year rolling return for 2015 covers January 1, 2011, to December 31, 2015. Then, for 2016, it's the average annual return from 2012 through 2016. Some analysts break down a multi-year period into a series of rolling 12-month periods.

When you look at rolling returns, you can see how a fund's returns stacked up at a particular point in time. If an investment shows a 9% annualized return over 10 years, that means if you invested on January 1 in Year 0 and sold on December 31 of Year 10, you earned the equivalent of 9% a year. But during those 10 years, returns could have varied a lot.

In Year 4, the investment might rise 35%, while it could drop 17% in Year 8. Averaged out, you get 9% per year—the average annualized return—but that 9% might not truly represent the investment's performance.

Instead, analyzing rolling returns shows you annual performance not just from January 1 to December 31, but also from February 1 to January 31 of the next year, March 1 to February 28, and so on. A 10-year rolling return can highlight an investment's best and worst decades this way.

In equity research and valuation, publicly traded companies release financial results quarterly in securities filings under generally accepted accounting principles (GAAP). Less often, they provide monthly statements with sales volumes or key performance indicators.

Utilizing Trailing 12 Months (TTM) for Financial Insights

A common rolling return period is trailing 12 months, or TTM. This refers to data from the past 12 consecutive months used for reporting financial figures. For a company, TTM represents its financial performance over a 12-month period that doesn't typically match a fiscal-year end.

When you analyze TTM returns, you're reviewing recent financial data in a yearly format. This annualized data is key because it neutralizes seasonality and reduces the impact of non-recurring issues in results, like temporary changes in demand, expenses, or cash flow.

TTM lets you assess recent monthly or quarterly data instead of older full-year data. TTM charts aren't great for spotting short-term changes but are useful for forecasting.

Companies doing internal financial planning have access to detailed, recent data. They use TTM to evaluate key performance indicators (KPIs), revenue growth, margins, working capital management, and other metrics that can vary seasonally or show temporary volatility.

Again, in equity research, companies release results quarterly under GAAP, and sometimes monthly with key indicators. SEC filings usually show results on a quarterly or year-to-date basis, not TTM.

To get a clear picture of the last year's performance, you as an analyst or investor often need to calculate your own TTM figures from current and past statements. Take General Electric (GE) as an example: In Q1 2020, GE had $20.5 billion in revenue versus $27 billion in Q1 2019. For full-year 2019, it was $95 billion. Subtract Q1 2019 from 2019 full-year and add Q1 2020, and you get $88.5 billion in TTM revenue.

The Bottom Line

Rolling returns give you a comprehensive view of an investment's performance over various time periods, with insights not skewed by the most recent data. By smoothing over multiple periods, they highlight strengths and weaknesses across different time frames, allowing for a more nuanced analysis.

Trailing 12-month (TTM) returns are a practical way to analyze recent data in an annualized format, helping neutralize seasonal effects and temporary anomalies. You need to understand rolling returns to accurately gauge performance trends and make informed investment decisions over the long term.