Misleading Fund Performance?

Over the past few quarters, we’ve developed the theme of drilling beneath the headlines to find out what is really going on: In the economy or in the stock market.

Today’s WSJ reminds us that the same is true of Mutual Fund performance:

"Stock-fund performance looking back over three years — a common time period for fund buyers to consider — has gotten rosier as the bear market of 2000 to 2002 has receded into history.

The improvement has been striking: Over the three years through September, U.S. stock funds gained an average 17.79% a year, according to research firm Morningstar Inc. Just three months earlier, the trailing three-year figure was 9.33%; another three months earlier, in March, it was 4.08%. Stock prices bottomed out three years ago this week.

The three-year figures through September look "fabulous" but illustrate that looking at returns over a single time period can be "incredibly misleading,"
says Daniel Wiener, editor of the Independent Adviser for Vanguard
Investors newsletter, who has tracked the improving three-year track
records of Vanguard Group’s funds.

Have a look at this chart of trailing 3 year performance:


Its not that the mutual fund managers suddenly got better; its that the devstating period of 2000-02 — when fund managers were "long & wrong" — have been falling off the 12 quarter history. Daniel Wiener suggests that investors "Look at multiple time periods to give yourself a little better perspective" on how a fund has performed in the past.

Incidentally, under Securities
and Exchange Commission rules, "materials that cite performance must
include returns through the latest quarter for periods of one year,
five years and 10 years, if a fund has been in existence that long.
Returns for the multiyear periods are annualized to show the average
yearly return to an investor who held for the entire time."

Something to keep in mind as you start seeing improving 3 year track records.


Mutual Funds on a Roll?
Performance of Portfolios Over Past 3 Years Has Improved,
But the Bullish-Looking Returns Sometimes Mask the Bear

THE WALL STREET JOURNAL, October 14, 2005; Page C1

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What's been said:

Discussions found on the web:
  1. Jos Theelen commented on Oct 14

    Is it fair to say that they are doing just like all the others in the market? Or like the main indices? Maybe some individual fund will do better or worse, but that is almost unpredictable, just like the stockmarket self. With no guarantees for the future.

  2. Greg Newton commented on Oct 14

    Better than that, the five year records are also starting to glow as the 2000-2001 period starts rolling out of the track records…

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