Mutual fund performance data for the third quarter, past year and other periods that ended Sept. 30 have begun to appear. Total returns for the top 25 and bottom 25 performers were the first to be released. Results for all other funds will be out before long.
Do these newly calculated total returns tell you all you need to know about your stock and bond funds? Can you use the new data to try to improve your fund portfolio's performance? How?
When you see the returns for your funds, focus on those for the latest one-, five- and 10-year periods. They indicate the funds' range of average annual returns, as well as their volatility.
Even if a fund's average annual rates for the three periods did not differ greatly, you may want to note whether returns varied greatly from year-to-year -- and judge whether the fund is too volatile for you.
Still, checking whether your funds have stayed on track -- helping you to accumulate your retirement nest egg or achieve ** other investment goals -- is not enough. It's also important to see whether your funds met expectations, based on their investment objectives and policies. You can make such judgments by comparing your funds' returns with meaningful benchmarks.
The most widely used benchmarks are indexes of securities prices. For stock funds, the most common one is the Standard & Poor's 500 Index, but there are many others. For bond funds, you can choose among several indexes, depending on whether the funds are invested in U.S. government bonds, both government and corporate bonds, or tax-exempt bonds.
Many funds voluntarily make such comparisons in reports to shareholders, but some do not.
Differences in opinion -- and practice -- remain.
Some argue that it's not always possible to identify an "appropriate" index. The S&P 500 may be OK for funds invested in stocks of large companies -- the kind that make up the 500 -- but would be wrong for funds invested in small companies. For these, the Russell 2000 or other indexes would be more suitable. But for many funds, there are no obvious candidates.
Others argue that no index of securities offers a proper comparison. Indexes involve no management and other annual costs or brokerage commissions, as funds do. Nor do indexes reflect cash reserves, which funds keep for redemptions or future investment. Cash hurts fund performance in up markets, but helps in down markets. And indexes may not reflect reinvestment of dividends, as a fund's total returns do.
Given the shortcomings of comparisons with indexes, a more meaningful benchmark might compare a fund's returns with those of other funds having similar objectives.
Such comparisons can be -- and are -- made with data calculated by Lipper Analytical Services for individual funds and then "crunched" further for peer groups.
Lipper has classified well over 2,000 bond and stock funds into roughly 45 categories. A number of fund companies use Lipper group data for performance comparisons in shareholder reports
and promotions (especially when they look good).
If you don't already know, determine which Lipper categories your funds are in. You can find out by calling the funds, or by looking them up in publications that provide Lipper data, such as the August issues of Standard & Poor's/Lipper's mutual fund profiles or of Barron's quarterly mutual fund section.
When you see the tables containing the latest Lipper performance data, copy the average returns for the latest one, five and 10 years for categories your funds are in. Then, when you get the data for your funds for the three periods, compare them with the group averages.
If your funds beat their group averages in every period, you may be able to relax -- if you're invested in the right groups.
But if one of your funds has been lagging, find out why. If its next shareholder report doesn't provide a forthright and acceptable explanation of its recent performance, consider switching to a better-performing fund in the same group.