Perspectives on mutual fund performance data |

Perspectives on mutual fund performance data

Investors, in general, tend to fixate on the quantitative aspects of an investment’s return, and rightfully so. However, when it comes to mutual funds, prudent investors should also be looking at what’s behind a fund’s performance numbers – or total return – to gauge the depth of its investment quality.The following remarks have been excerpted from my next book , which should be available by the end of April, and provide some useful perspective on mutual fund performance data:• Total Return: Total return figures are calculated and expressed net of a fund’s expenses, i.e., those included in a fund’s expense ratio. Investors in load-funds should note that in fund literature and the financial press, generally, the performance of these funds is reported without adjusting for the impact of the sales charges. However, 12b-1 fees, since they are part of the expense ratio calculation, are included. In addition, investors should be aware that time periods also affect total return. Looking back in time from this year, a three-year measurement picks up one excellent year (2003) and two fairly good years (2004 and 2005), all of which produce an overly positive take on a fund’s total return. A five-year measurement picks up two very poor years (2001 and 2002) and the aforementioned good years (2003-05), making it more representative in terms of fund performance. Obviously, 10-year measurements of performance will most likely cover a mix of market conditions and translate into a more reliable long-term indicator of a fund’s investment management abilities.Annualized Versus Actual Total Return: For any time period more than one year, a fund’s total return is “annualized” and so reported. Let us assume that the XYZ Fund is said to have an average-annual five-year total return of 12 percent. This does not mean that XYZ delivered an actual annual total return of 12 percent in each of the five years measured – the 12 percent is an average, or annualized return.While this general indicator of fund performance is helpful, the prudent fund investor will also want to look at a fund’s year-to-year, or inter-annual, actual total returns. There is more investment quality reflected in a fairly steady yearly performance rather than one with drastic ups and downs. If we use an amusement park analogy for gauging the investment quality of a fund’s performance, a smooth ride on a merry-go-round would be preferable to the thrills of a ride on a roller coaster. New Funds/Managers: Unless there are some compelling special circumstances, simply avoid funds with less than three years of performance. Also, new managers need time to prove themselves. There are dozens of good funds with long-term track records and managers that have proven themselves. With some exceptions, when it comes to your hard-earned dollars, invest with reliable veterans rather than with the new kids on the block. The Disclaimer: In the investment business, while true, the oft repeated statement that “performance data represents past performance, which is no guarantee of future results” has become a cliche. Of course, the real purpose of this statement is to provide liability protection to purveyors of investment products as opposed to providing guidance to investors. I would like to tack on the phrase, “But, it is what we have to work with and much better than a crystal ball.” The real problem here is the phrase, “no guarantee,” which, of course, should alert investors to the simple fact of life that future investment performance is subject to many variables.Benchmarks: A fund’s performance metrics only have meaning if they are compared to appropriate “guideposts,” or benchmarks. In the financial field, there are dozens of indexes against which analysts measure the performance of any given investment. In addition to formalized benchmarks, mutual funds should also be compared to their peers, or peer groups, and relevant fund categories. The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing and an independent registered investment adviser. Loth can be reached at 827-5591 or Daily, Vail, Colorado

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