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Steady-Eddie or Roller Coaster?

How rolling returns can help you decipher the type of fund you own.

Karen Dolan, 10/17/2011

Investors watch performance closely, with the past one- and three-year periods typically nabbing the bulk of their attention. There's a strong link between the amount of money rushing in or out of a fund and how well it performed in the past 12 or 36 months. Yet the most recent year is no more or less important to consider than any 12-month period (or any trailing period for that matter) during a manager's history running a particular investment style. But because the trailing returns ending last month or last quarter are easy to see in account statements and online, they hold a special spot in recent memory and impact behavior--a phenomenon commonly referred to as recency bias. 

Rolling returns offer a useful lens into a fund's fuller return history and can help investors see through the haze caused by the latest data. By looking at rolling returns, investors can gain a full appreciation for how a fund's returns stacked up at any point in time, not just through the latest month or quarter-end. For example, a fund's current trailing three-year return spans from October 2008 through the end of September 2011--just one discrete period that includes some of the worst months ever for stocks. With rolling returns, however, an investor can look back 10 years or longer to see how a particular fund stacked up in every three-year period throughout its relevant history, encompassing a wider range of market types.


Judged through the rolling lens, some funds that currently appear at the top of their game look less noteworthy: Over time, they've had trouble sustaining an advantage. Meanwhile, others that wouldn't otherwise stand out are revealed as amazingly consistent. T. Rowe Price, for example, has plenty of funds that are consistently strong and steady, though not typically chart toppers over shorter stretches. Many of the firm's funds are able to lock in top quartile long-term results not by beating their peers by large margins over short stretches, but by keeping ahead consistently while more inconsistent rivals pop in and drop out of the rankings.

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