Time to boost funds' 10-year returns in November

Mutual funds

September 28, 1997|By NEWSDAY

If you own a stock mutual fund that is more than 10 years old, expect to see a strong, if not spectacular, jump in its annualized total return numbers in November.

You can credit time, and not necessarily the acumen of the fund managers.

Mutual fund performance is usually measured monthly. So money invested Oct. 31 will show very different returns from the same amount invested just a month earlier. The reason is simple: the Oct. 19, 1987, stock-market crash, when the market fell 22 percent in one day.

The differences can be surprisingly high. For example, the unmanaged Vanguard 500 Index Portfolio had an average annual return of 14.04 percent from Sept. 30, 1987, to Aug. 31, 1997. But from Oct. 31, 1987, to Aug. 31 of this year, it had a 17.05 percent annualized average return.

The cash difference: $10,000 invested on Sept. 30, 1987, would have returned $36,799, while the same amount invested just a month later would have brought you $47,014.

It also means that the so-called "mountain charts" -- those graphics that show how much a $10,000 investment has grown -- will look a lot better for funds with 10-year histories.

That group covers only about 20 percent of all stock funds, reflecting the explosive proliferation of funds in recent years.

But it includes most of the giants, such as Fidelity's $62 billion Magellan Fund, the $35 billion Fidelity Growth and Income Fund, Vanguard's $46 billion index fund and American Century's $22 billion 20th Century Ultra.

Ultra's average annual return will be boosted a whopping five percentage points, from 18 percent to 23 percent, when the October 1987 figures wash out.

"When you do the mountain charts and you compound the 5 percent difference it is a very significant jump," said Don Phillips, president of Morningstar Mutual Funds, the Chicago mutual fund ratings service.

"The real problem is that the people and practices that helped make some of the long-term records have changed," Phillips said. Consider the most widely publicized fund, Magellan, which has had four managers in the past 10 years.

Other funds have undergone similar changes.

"The strategies and the managers have often changed, and the funds are not necessarily the same," said Dan Phelps, senior research analyst for CDA/Weisenberger, the Rockville financial information service that provided the statistics cited above.

The pre-crash numbers are probably more important for new investors and those who like to invest on their own, because they need to know how funds performed in down markets -- and there have been few of those since the 1987 crash, Phelps said.

"Since not that many funds are going to have 10-year numbers," he said, you should also look at the seven-year returns, which will include the 1990 bear market. The Dow dropped 15.5 percent from August through October that year.

Phelps said that if your fund does not go back to 1987 or 1990, you might want to look at a similar fund or index fund in that category, one with a longer history, to get an idea of how your fund might do in a down market.

But getting that information on comparable funds is not always easy.

So Michael Lipper, president of Lipper Analytical Services Inc., the Summit, N.J., company that ranks funds based on performance, said he plans to keep the effects of the 1987 crash in his statistics for a while longer. His 10-year figures will be stretched to cover 11 years.

"The key is to keep the three worst months of 1987 so people will know how the funds performed, because it hasn't happened in so long," Lipper said.

Another key year, especially for bond-fund investors, is 1994. That year saw a grisly bear market in bonds, and one in which emerging-market stock funds also took a major hit when Mexico devalued the peso.

But keep in mind that about half the stock funds around now, including many international and aggressive-growth funds, are less than five years old.

The market generally has been growing during that time, and booming since 1995. Of course, some market sectors, including aggressive growth and technology, have had sharp downturns, followed by rebounds.

"I don't think you have to be crash-centric and start all performance ratings based on the 1987 crash," Phillips said. "On the other hand, I think you have to look at the funds with similar objectives, and how they performed in bad markets."

Pub Date: 9/28/97

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