The vintage effect refers to the year in which a fund first makes its investments or its vintage year.

This can have a significant impact on the fund's returns as it takes into account the external market conditions at that time, and this is because most private market funds have a set investment period within which the fund makes its investments and a maximum life by which time all investments must be sold.

These conditions mean that the returns are often impacted by the prevailing economic and financial market conditions in place when the fund was first set up, and then during the rest of the fund's life, which are not in the control of the fund's manager, but will have an impact on returns.

If the first year of an investment is during an economic downturn, the investment will likely grow at a slower pace than anticipated or lose value, and thus offer lower returns.

This makes it more difficult in future years to recover this growth and create higher returns as the underlying value has not initially moved in line with expectations.

If performance in year one is stalled due to economic factors across the board, we can refer to this as the vintage effect.

For example, 2020 may have been a tough year for traditional retailers due to the pandemic.

Any retailer opening a store in this year would've seen a vintage effect from this.

Conversely, if a company's vintage year was during an economic boom, it would likely have grown ahead of its initial expectations.

This would have provided more momentum in sales and profit to support enhanced growth for the following year and beyond.

This is the vintage effect again.

The vintage effect is an important factor to consider when comparing investments.