How rolling returns can help you decipher the type of fund you own.
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.
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.
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
Take T. Rowe Price
Equity Income PRFDX, for example. Brian Rogers has
managed the fund since 1985. Over 36-month rolling periods spanning Rogers'
26-yearlong tenure, it has landed in the top quartile of its category only 22%
of the time, but in the top half a more impressive 75% of the time. Notably, the
fund has rarely landed in the bottom quartile (less than 2% of the time), so it
hasn't had to post stellar returns just to pull itself out of any slumps; it
tends to avoid the big slumps altogether.
CGM Focus CGMFX has a drastically different
return profile from Equity Income. When it's hot, it's really hot. And when it's
cold, it's bitterly cold. Over long stretches, CGM Focus has locked in returns
that are hard to beat. From its inception in 1997 through the end of September,
the fund has gained a cumulative 305% versus the S&P 500's gain of 53%. In
fact, over every rolling three-year period spanning its entire 14-year history,
the fund has landed in the top quartile of its peer group 80% of the time: A
record that's hard to match.
Despite CGM Focus' success, many
investors have failed to benefit because the ride is incredibly rocky and its
shareholders haven't proved patient. Over rolling 12-month periods throughout
its history, the fund splits its time between the top quartile and bottom
quartile of peers. And, in an absolute sense, the fund has posted tremendous
gains that attract new investors and has followed those hot runs with large
losses. The fund gained 80% and beat 99% of large-growth funds in 2007, for
example, and lost 48% trailing behind 96% of peers in 2008. Only investors
willing to stick around for many years following the dips are able to experience
the fund's benefits.
some funds fail to distinguish themselves, and the problem is persistent. Robert
Hagstrom founded and has managed the Legg Mason Capital Management Growth LMGTX since 1995. He put up strong
numbers in the late 1990s but has not been able to amass a reliable advantage
since then. The pattern is clear when you look at rolling returns. The fund has
outperformed the average large-growth fund in only 74 out of 162 rolling
three-year periods since its launch in 1995, and most of those periods came in
the first several years.
our fund analysts frequently discuss rolling returns in their analyses of
various funds, you can view rolling returns for any fund yourself. To see the
graphs, go to a fund report on Morningstar.com. Then click on the Performance
tab and look for "Customize Interactive Chart." Within the chart, you can switch
from "Growth" to "Rolling Returns." You might be surprised at the stories those