What Is Absolute Percentage Growth?
Absolute percentage growth is an increase in the value of an asset or account expressed in percentage terms. Absolute percentage growth implies that the increase in value is displayed on a standalone basis, and not in relation to a benchmark or another asset on a relative basis.
Also referred to as the absolute return, absolute percentage growth thus measures the gains or losses independent of any benchmark or other standard.
- Absolute percentage growth measures the change in an investment's or portfolio's value over some period without reference to some benchmark or external yardstick of performance.
- It is a percentage measure of absolute return, which can be either positive or negative in nature.
- While investors may measure their absolute percentage growth year-on-year, most investment managers prefer relative measures of return performance.
Understanding Absolute Percentage Growth Explained
In the investment industry, performance is generally measured on a relative basis, rather than in absolute terms. For example, a small-cap U.S. mutual fund may be up 30% in a given year, which by any yardstick is a good return in absolute terms. But if the small-cap index that it tracks (such as the Russell 2000 index) is up 35%, the fund is considered to have lagged its benchmark by five percentage points. The fund would also be measured against other funds in its category to judge whether it has outperformed or underperformed its peers.
The term "absolute percentage growth" can cause some confusion since "absolute" sometimes refers to the total increase or decrease in asset value in dollar terms, while "percentage" refers to the relative change (increase or decrease) over a period of time. Thus, if stock X increases in price from $10 to $15, the absolute increase is $5, while the percentage increase is 50%. The term may, therefore, be more accurately referred to as absolute growth (or absolute return) in percentage terms.
While institutional investors focus on relative returns, retail investors are typically more concerned with absolute returns. While setting out investment objectives, a retail investor may specify to the advisor that the target return for a portfolio should be, say, 5% or 7%; the average investor is usually unlikely to insist that the portfolio should outperform a selected benchmark by x percentage points over a period of time.
The retail investor's performance focus on absolute growth in a portfolio, rather than relative growth, can be an issue in savage bear markets, especially if the investor is fairly risk-averse. If such an investor's equity portfolio is down 10% in a year when the benchmark index has declined 20%, the fact that the portfolio has actually outperformed the benchmark by 10 percentage points is likely to offer scant consolation to the investor.
Absolute Return vs. Relative Return Example
One way to look at absolute return versus relative return is in the context of a market cycle, such as bull versus bear. In a bull market, 2% would be seen as a horrible return. But in a bear market, when many investors could be down as much as 20%, just preserving capital would be considered a triumph. In that case, a 2% return doesn't look so bad. The value of the return changes based on the context.
In this scenario, the 2% would be the absolute return. Relative return is the reason why a 2% return is bad in a bull market and good in a bear market. What matters in this context is not the amount of the return itself, but rather what the return is relative to.