How to Decipher Those Performance Figures
Now that the first quarter of 1990 is over, you’ll soon see the first set of data on how well or poorly mutual funds performed in the latest three months and latest 12 months--as well as over longer periods.
Then you’ll face a choice: Stay with the funds you have, possibly adding to your holdings. Or switch funds, maybe even changing to ones that have an entirely different investment objective.
You’ll also be better able to judge where to invest any new money you have available, including contributions you expect to make to an individual retirement account by the April 16 deadline.
If you haven’t invested in a mutual fund, you can use the latest information on performance to devise a strategy for getting started.
When this performance data is released--possibly as early as Monday--how do you use it?
Most important is “total return”--not just for the latest three months or latest year, but for a number of years. Because these figures reflect past performance, they are hardly infallible indicators of performance in the future. But they may give you an inkling of how a fund is likely to fare under comparable market conditions in years ahead.
Total return measures the rate at which a fund has grown or declined in value, assuming that all dividends and capital gains distributions have been reinvested in the fund. That assumption is required to make meaningful comparisons among funds.
Even though this definition of total return is generally accepted, you’ll still see different figures for your funds’ performance in difference places. Figures in newspaper tables, fund advertisements, financial newsletters and fund literature may differ.
Which are correct? All may be. Differences are because of the methods for calculating them and the audience and objectives they’re designed to address.
One rate can help you see how well or poorly your investment in a fund has worked out and to consider where you ought to invest next. Another rate may help a mutual fund company determine how well or poorly the portfolio manager has invested the fund’s assets.
At first, it would seem these two rates should be the same. Think again. One rate will take into account the charge or “load” you pay when you invest in a fund or redeem your shares. The other won’t. Only for “no-load” funds, those that you can buy or sell without a sales charge, will the rates be the same.
Take a look at the accompanying table for an illustration of this point. It shows the total returns that were achieved, for example, by 1989’s top equity-income funds before and after allowance is made for sales charges. Returns “before sales charge” tell a management how well a fund’s assets were managed. Returns “after sales charge” tell investors how well a fund handled the portion of their money that was put to work. (The sales charges end up in the hands of brokers and dealers; they’re not invested for you.)
Note that the differences because of sales charges, although quite significant for one year, tend to shrink--but never disappear--with time. You’ll also note how advantageous it can be not to have any charges imposed in the first place.
Confusing? Perhaps, but it used to be worse. Until about two years ago, fund managements used whatever data they felt would best help them sell shares. Not only did they not adjust for sales charges, but they often only touted their performance over periods that made them look best and made comparisons with others difficult.
The Securities and Exchange Commission stepped in, issuing new rules to help investors. It told funds that in advertising total returns they must provide figures for one-, five- and 10-year periods after adjusting for maximum sales charges. Funds also could choose to not volunteer any data on total return in their ads.
The results have been interesting. Some funds’ ads don’t mention total returns at all, extolling their funds’ qualities in only the most general way. Franklin U.S. Government Securities Fund (which has a 4% sales charge) proclaims, for example: “Invest in America! A solid investment with a high current return.”
Others, including funds with sales charges, trumpet their results. Fidelity Magellan has advertised average annual returns of 30.55%, 23.44% and 28%--after adjustment for a 3% charge--for the latest one, five and 10 years, respectively
Although funds are complying in different ways with the SEC rule, data services such as CDA Investment Technologies, Lipper Analytical Services and Morningstar, which serve institutional and individual subscribers and make their data available to the print and electronic media, are uniformly publishing returns without adjusting for sales charges.
A. Michael Lipper, president of Lipper Analytical Services, is sympathetic to the individual investors’ dilemma.
“For individuals, it’s important not only to adjust for sales charges but also for taxes,” he says. “We find it difficult to come up with the algorithm to do this appropriately.”
His advice to investors: “Use our data as a level playing field, then adjust for sales charges and taxes the returns for funds that seem to be attractive.”
No matter which performance data you use, check the fine print that describes how they are calculated.
THE IMPACT OF CHARGES Chart shows how sales charges affected investors’ returns on 1989’s top equity income funds
Total Return Avg. Ann. Total Ret. 1989 1985-89 Maximum Before After Before After sales sales sales sales sales FUND charge charge charge charge charge Financial Ind. Income None 31.89% 31.89% 19.03% 19.03% Eaton Vance Equity Inc. 6% D 29.25 21.50 * * Kidder Peabody Eq. Inc. 5% D 28.94 23.94 * * Parkstone High Inc. Eq. 4.5% 28.20 22.29 * * American National Inc. 8.5% 28.12 18.10 15.17 13.32 National Total Return 7.25% 27.57 18.04 15.98 13.84 United Income 8.5% 27.49 17.63 21.82 19.87 USAA Income Stock None 27.13 27.13 * * Keystone Amer. Eq. Inc. ** 26.74 22.84 * * Delaware Decatur II 4.75% 26.57 20.60 * * Vanguard Equity Income None 26.50 26.50 * * TOO MUCH DATA FOR COLUMN D -- Deferred sales charge * -- Not in operation for all 5 years ** -- 2% front-end sales charge plus 2% back-end sales charge Note: List includes only funds open to new investors Sources: Mutual funds; Lipper Analytical Services HOW MUTUAL FUNDS PERFORMED Average total return, including dividends, in percent for periods ended Thursday, March 29. TOP 10
Fund Type Notes 12 mos. Yr.-to-date Week Japan Fund PC NL +0.14% -13.10% +7.27% GT Global Japan PC +23.91 -11.53 +5.46 Sherman, Dean Fund CA NL +22.71 -10.49 +4.57 Nomura Pacific Basin PC NL +7.65 -13.91 +4.47 Provident Mutual World IF +0.99 -9.05 +4.05 Tyndall-Newport: Far East PC +1.35 -7.88 +3.93 Fidelity Pacific Basin PC L -4.56 -13.61 +3.86 Glenmede: International IF NL +10.29 -4.84 +3.65 Tyndall-Newport: Global GL +0.68 -5.80 +3.41 Schroder Cap: Int’l Eq IF NL +15.31 -6.75 +3.37
BOTTOM 10
Fund Type Notes 12 mos. Yr.-to-date Week Rushmore: Prec Mtl Ind AU NL *% -6.96% -6.41% Thomson McKinnon: PR MT AU NL,R +2.27 -9.84 -6.52 US New Prospector AU NL +3.98 -9.29 -6.62 Keystone Prec Metals AU NL,R +8.50 -9.28 -6.64 USAA Inv Tr: Gold AU NL +4.57 -8.80 -6.65 Benham Eq: Gold Eq Ind AU NL +17.81 -6.23 -6.79 Van Eck: Gold/Resources AU +1.86 -10.69 -7.03 Strategic Investments AU +16.51 -19.50 -7.39 Blanchard Precious Mtls AU NL -4.47 -10.98 -7.68 Strat Gold/Minerals AU -3.18 +19.15 -9.68
TYPE: AU = gold, B = balanced, CA = capital appreciation, CV = convertible securities, EI = equity income, EU = European regional, FI = fixed income, FS = financial securities, FX = flexible portfolio, G = growth, GI = growth and income, GL = global-international and U.S. stocks, GX = global flexible portfolio, H = health/biotechnology, I = income, IF = international, MI = mixed income, NR = natural resources, OI = option income, PC = Pacific regional, RE = real estate, S = specialty/misc., SG = small company, TK = science and technology, UT = utility, WI = world income. NOTES: NL means no sales charge, L means sales charge of 4 1/2% or less; R means redemption fee may apply. Source: Lipper Analytical Services HIGHEST SAVINGS YIELDS Highest yields reported by federally insured banks and thrifts as of March 28, based on the lowest minimum deposit to open an account. National average based on yields offered by 100 largest banks and thrifts in the 10 largest markets. Southern California average based on yields offered by 10 largest area banks and thrifts. MONEY MARKET ACCOUNT National average: 6.25 Southern California average: 5.82 Blackstone B&T;, Boston, MA: 8.33 Fst Dep Natl Bk, Tilton, NH: 8.32 Fst Signtr B&T;, Portsmth, NH: 8.30 Bk of New Eng., Boston, MA: 8.30 Colonial Nat Bk, Wilmington, DE: 8.29 6-MONTH CD* National average: 7.89 Southern California average: 7.94 Connecticut B&T;, Hartford, CT: 9.00 Citytrust, Bridgeport, CT: 8.83 Maine Svgs Bank, Portland, ME: 8.78 Columbia S&L;, Irvine, CA: 8.76 Bk of New Eng, Boston, MA: 8.65 *Assumes re-investment of six-month CD at same rate to earn yield shown. 1-YEAR CD National average:8.02 Southern California average:8.09 Connecticut B&T;, Hartford, CT: 9.00 Bk of New Eng, Boston, MA: 9.00 Maine Svgs Bank, Portland, ME: 8.89 Mercantile Bank, Boston, MA: 8.73 CorEast Svgs Bk, Richmnd, VA: 8.72 2 1/2-YEAR CD National average:8.02 Southern California average:8.04 Maine Svgs Bank, Portland, ME: 8.89 Mercantile Bank, Boston, MA: 8.83 Citibank/SD, Sioux Falls, SD: 8.81 Home Owners Svgs, Burlgtn, MA: 8.74 Federal Svgs Bk, Baltimore, MD: 8.70 5-YEAR CD National average:8.04 Southern California average:8.08 Mercantile Bank, Boston, MA: 8.95 MetropBkforSvgs, Leesburg, VA: 8.88 Fed Svgs Bank, Baltimore, MD: 8.84 Eastn Svgs Bk, Hunt Valley, MD: 8.80 Am Fed Svgs Bk, Rockville, MD: 8.80 Source: 100 Highest Yields, Bank Rate Monitor, N. Palm Beach, Fla. 33408
