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15 Years of Funds and Investors

Patience has paid handsomely.

Russel Kinnel, 10/08/2013

The article was published in the September issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

It's great to have the 2000-02 bear market so far in the rearview. One of the strangest bear markets, it crushed tech and other large-growth stocks while leaving bonds and even a lot of equities outside of large growth unscathed. Those of us who stayed diversified rather than jumping on the tech band­wagon had a relatively easy go of it, though it was still very stressful to live through.

Vanguard Wellington VWELX, for instance, deliv­ered a solid 5.8% 15-year investor return thanks to a prudent investment style, low costs, and no surprises.

So, it was quite different from the 2007-09 bear market, which crushed almost everything but was especially hard on large value--the home of big banks and insurers. This is why I find 15-year total returns and 15-year Morningstar Investor Returns so enlightening. They capture the craziest part of the dot-com bubble and the brutal bursting of the bubble that followed. Those few years perfectly illustrated the notion that markets tend to overdo things in both directions.

I've run the total returns and investor returns for the Morningstar 500 funds, and I'll highlight those with the best and worst 15-year investor returns. Investor returns are an estimate of the returns a fund's share­holders actually received. Because only a minority of investors hold a fund's shares for an entire 10- or 15-year period, few of them earn the exact same return as the fund's stated return.


Investor returns use fund flows to adjust returns so that periods when more investors hold the fund carry greater weight. Across the fund world the typical investor falls about 0.92% per year short of stated fund total returns. The gap between investor returns and total returns essentially tells you how well investors timed their investments. Both the abso­lute investor-return figure and the gap are useful information. The more important figure, though, is the investor return as that tells how investors actually fared. A small gap isn't much consolation if the total return and investor return are meager. 

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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