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Misleading Fund Returns

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Investors are notoriously bad at choosing when to buy and sell mutual fund shares. And certain funds make it especially difficult. The volatile nature of these funds makes it more likely that you will buy shares after the fund has had an exciting run-up and is about to retreat…and sell shares when the fund has been in the doldrums but is set to rebound.

Example: The Guinness Atkinson Global Innovators Fund had annualized returns of 9% over the past 10 years, ranking in the top 1% of its category. But many investors in the volatile fund didn’t do nearly as well. The typical investor saw annualized returns of just 4% over that period.

Fund shareholders in general over the past decade have averaged 1.13 percentage points less in annualized returns than fund performance figures indicate.

There’s a way you can identify which funds are most or least likely to foster such inopportune behavior. Look at “investor returns.” This measure reflects how the typical investor in a fund has fared based on returns adjusted for the fund’s asset inflows and outflows.

Example: Over the past 10 years, FPA Crescent—a fund that is nearly 40% less volatile than the overall stock market—had investor returns averaging 6.6%, which is only slightly less than its overall annualized returns of 6.9%.

You can find investor returns at Morningstar.com. In general, a gap of more than one percentage point warrants further investigation into a fund’s volatility.

To smooth out the ride, if you decide to invest in a very volatile fund, consider automatically buying a certain fixed dollar amount of shares each month regardless of how the stock market is doing.

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Source: Christine Benz, director of personal finance at Morningstar Inc., Chicago, which tracks 530,000 investment offerings. Morningstar.com Date: October 1, 2016 Publication: Bottom Line Personal
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