Mutual fund performance data is quite useful, but you need the right perspective.
A version of this article originally appeared in Morningstar FundInvestor.
Short-term returns tell you something about when a fund prospers and when it loses money, but you have to go long to judge a manager's skill. In fact, you should go as long as possible--the ideal range is from the time a manager becomes lead manager through the current date. Emotions tell us that the most recent results are somehow more meaningful, but science says you want as many observations as possible. Even the trailing 10-year returns are shedding the 2000-02 bear market.
A couple of years ago people wanted to throw in the towel on Oakmark Select OAKLX after a stretch of poor performance and a mistake in its top holding. As Morningstar associate director of fund analysis Mike Breen pointed out in FundInvestor at the time, though, the fund was still miles ahead of the S&P 500 since its November 1996 inception. Indeed, the fund has come back, gaining 11.3% annualized versus 5.3% for the S&P 500 under Nygren. It turns out manager records are a decent predictor of performance.
A couple of bad years don't worry us too much, but when a fund manager's long-term record deteriorates significantly, we get worried.
Let's take a long-term perspective on some long-tenured managers to see how they are really doing. In some cases, I found comforting reassurance in the strength of a manager's record. In others, I found damning returns that make a compelling case against the fund. In all cases, returns are through end of 2011.
Longleaf Partners LLPFX
Longleaf Partners has been remarkably consistent in its value approach. Dating back to 1987 when the fund was launched, Mason Hawkins and company have produced a 10.6% annualized gain compared with 8.6% for the S&P 500. That's worth keeping in mind because its focused portfolio has regularly suffered bouts of underperformance. For example, it endured two bottom-decile years in 2007 and 2008 before rebounding for two top-decile years. Hawkins and Staley Cates have proved to be calm investors amid the storm who are better able to maintain their long-term focus than most.
Marsico Focus MFOCX
Tom Marsico has produced a 5.5% annualized return versus 3.7% for the S&P 500 and the average large-growth fund. That's encouraging in light of recent sluggishness, but I do have one long-term concern. Marsico bought his firm back from Bank of America BAC with a chunk of borrowed money in 2007, and assets have shrunk considerably since then, making that debt service a real burden. The firm recently lost manager Corey Gilchrist, and I would imagine the firm's problems make hiring more challenging.
The Best Versus Benchmarks or Categories
I took a look at the Morningstar 500 funds versus their benchmarks or category peers over each fund's manager's tenure through December 2011. I ranked them by annualized outperformance. I limited the search to funds whose managers have at least five years' tenure.