Funds Going from Heroes to Ho-Hum

If you're a regular reader, you may be tired of our constant reminders to view short-term returns with a skeptical eye. Unless they're used to judge specifically whether a fund performed as one would expect under extreme conditions--such as a conservative fund holding up better than bolder rivals when high-priced growth stocks plunge--returns of six months or a year typically reveal little about a fund's worth or a manager's talent.

That's why we advise readers to consult longer-term records in order to obtain a deeper understanding of a fund.

Bad news. Because of the crazy up-and-down ride the stock market seems to enjoy providing us, now even 10-year returns must be examined with care. That will become more and more evident over the coming months. Keep this in mind when New Year's Day arrives and the decade's performance numbers are widely published and discussed.

That Was Some Party
In the fourth quarter of 1999, the long stock-market rally reached incredible heights. The S&P 500 Index rose 14.9%. The Nasdaq Composite climbed 48.2%. The frenzy continued into the first few months of 2000.

That story would be just ancient history--fodder for the cautionary tales rolled out by financial-planning authors--if it weren't for the approaching end of the 21st century's first decade. Unless the coming months provide a 1999-style blowout, many 10-year returns will change dramatically as we head into--and proceed through--2010. That's because a couple of spectacular quarters are about to be replaced by more mundane ones.

Take a look at BlackRock International Opportunities BREAX. For the 10-year period through the end of this year's third quarter (Sept. 30), the fund had an astounding 14.1% annualized return--the highest return of any international fund not specifically focused on emerging markets. But if you look at its return for this decade alone--that is, from Jan. 1, 2000, through Sept. 30, 2009--its annualized gain falls to 7.7%. That's still strong; it beats the relevant category averages. But that's a shocking difference simply for moving a starting point ahead three months. And that return doesn't land it as high in the rankings as the full 10-year number does right now.PAGEBREAK

The explanation is simple: In 1999's final quarter, BlackRock International Opportunities soared 81.6%. (The MSCI EAFE Index, which probably thought it was enjoying a darn good quarter, rose 16.8% in that time frame.) In fact, the fund then notched a further 39.5% gain in the first two months of 2000 (versus a 3.9% loss for EAFE). So, the fund's 10-year record likely will become even less impressive as next year progresses and the early months of 2000 disappear.

That's an extreme example. But there are many funds that outperformed mightily in the last legs of the stupendous tech/Internet rally and whose 10-year numbers and rankings consequently will soon be in flux.