Latest Mutual Fund Figures Distort True Performance

Rolling returns tell a more detailed tale

   

question thinking man Latest Mutual Fund Figures Distort True PerformanceInvestors are about to be bombarded with some of the most misleading performance numbers of the year. The reason: Many mutual fund ranking systems, services, and tables and charts use three-year return figures in their calculations and displays. The three-year numbers through November 2011 completely distort true fund performance.

But don’t look for mutual fund companies or ratings services to be forthcoming about these shortcomings.

The numbers are staggering. For instance, the Vanguard 500 Index Investor (MUTF:VFINX) is sporting a three-year annualized return of 14% through November. That’s huge! Imagine compounding your money at 14% for three years — it adds up to a nice 48.3% total return. And that’s not even the best of the bunch.

Looking at Vanguard’s equity funds (a full table is below), you’ll see that the Vanguard Capital Value Inv (MUTF:VCVLX) generated a 26.5% annualized return over the past three years, which, when compounded, is better than a double — generating a total return of 102.6%.

The list goes on and on. In the table below, I’ve compared the three-year and five-year returns side-by-side, and the numbers for most funds look a whole lot different — huge three-year returns and minuscule five-year returns.

But there’s a better way to measure fund performance. It’s called rolling returns.

Check out the two extra columns in the table below. These show average annualized three-year and five-year returns based on every three-year and five-year period over the past decade, rolled ahead month by month. Rolling returns give a much more accurate picture of a fund’s performance. Rather than “point-in-time” numbers, the rolling numbers account for the fact that investors don’t invest all their money at the beginning of the current three-year or five-year period; they invest their money as they can, so they are in fact investing over many three-year and five-year periods.

You may note that for many funds, the average rolling returns are very consistent across three- and five-year periods, unlike the point-in-time numbers most investors are familiar with. This is even true for foreign funds, which, while positive over the last three years, have generated losses over the last five. Those funds’ rolling returns give a more clearheaded view of performance over multiple three- and five-year periods over the past decade.

For an investor, finding a fund that has outperformed over multiple three- and five-year periods is bound to be immensely more satisfying and profitable than finding one that happens to have outperformed over just one. A fund like the Vanguard Dividend Growth Inv (MUTF:VDIGX) may look less appealing because its 3-year return didn’t beat the market. But over many three-year periods, it has nicely outperformed. (The fund is one of my favorites.)

Or consider the  Vanguard Windsor II Investor (MUTF:VWNFX), which didn’t beat the market over either the three-year or the five-year period ending in November, but has handily outperformed over many three-year and five-year periods.

I hope you’ll find this of interest, and will view the upcoming onslaught of tables and charts touting three-year returns with a little skepticism.

Happy Holidays.

Annualized Average Rolling
   3-Yr.
Return
5-Yr.
Return
3-Yr.
Return
5-Yr.
Return
DOMESTIC EQUITY
500 Index 14.0% -1.3% 3.3% 3.6%
Capital Opportunity 17.7% 2.9% 8.3% 8.3%
Capital Value 26.5% -8.7% 4.8% 4.0%
Convertible Securities 18.2% 21.0% 7.4% 7.5%
Dividend Growth 13.7% 19.0% 5.7% 6.1%
Energy 15.7% 23.3% 17.4% 17.3%
Equity Income 13.3% 7.3% 4.6% 5.0%
Explorer 21.4% 7.3% 5.5% 5.0%
Extended Market Index 21.1% 7.8% 7.3% 6.9%
Growth & Income 13.3% -7.9% 2.5% 2.7%
Growth Equity 16.7% 1.3% 2.5% 2.9%
Growth Index 18.2% 13.4% 3.4% 3.8%
Health Care 15.1% 20.7% 6.9% 6.8%
Market Neutral -1.1% -0.1% 1.6% 2.4%
MidCap Growth 21.3% 20.8% 6.7% 6.8%
MidCap Index 21.9% 6.3% 7.1% 6.7%
Morgan Growth 17.7% 4.9% 4.5% 4.7%
Precious Metals & Mining 36.4% 30.6% 19.2% 19.7%
PRIMECAP 15.5% 11.9% 7.1% 7.2%
REIT Index 26.5% -11.0% 8.3% 7.5%
Selected Value 20.4% 6.0% 7.4% 6.9%
SmallCap Growth Index 24.7% 20.1% 7.5% 7.2%
SmallCap Index 21.2% 9.1% 7.2% 6.7%
SmallCap Value Index 17.6% -2.0% 6.4% 5.7%
Social Index 16.5% -12.7% 1.2% 1.2%
Strategic Equity 19.9% -6.8% 5.3% 4.6%
Tax-Managed SmallCap 18.8% 9.9% 7.0% 6.4%
Tax-Mgd. Capital Apprec. 15.4% 0.9% 4.1% 4.3%
Tax-Mgd. Growth & Income 14.1% -1.1% 3.4% 3.6%
Total Stock Market Index 15.4% 1.4% 4.3% 4.4%
U.S. Growth 14.9% 3.6% 2.3% 2.4%
U.S. Value 10.8% -12.2% 2.6% 2.6%
Value Index 11.1% -11.5% 4.2% 4.3%
Windsor 15.1% -14.2% 3.3% 3.2%
Windsor II 13.4% -5.5% 4.6% 4.6%
FOREIGN FUNDS
Developed Markets Index 10.5% -16.9% 7.5% 7.9%
Emerging Markets Index 23.9% 20.0% 17.7% 18.1%
European Index 10.3% -19.2% 7.7% 8.3%
Global Equity 14.6% -13.4% 7.4% 7.5%
International Explorer 17.8% -12.7% 11.9% 11.4%
International Growth 16.3% -4.1% 8.6% 9.1%
International Value 10.5% -14.8% 9.0% 9.4%
Pacific Index 10.8% -11.8% 7.2% 7.1%
Tax-Managed International 10.5% -16.4% 7.7% 8.1%
Total International Index 13.0% -11.2% 9.0% 9.4%
Notes: Annualized returns are through November 2011. Average rolling returns are based on every 3- or 5-year period, rolling monthly over the last decade.

Article printed from InvestorPlace Media, http://investorplace.com/2011/12/mutual-fund-figures-distort-true-performance-rolling-returns-vfinx-vcvlx-vdigx-vwnfx/.

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