Beware the Changing Fund Numbers

Even though investors know better than to put too much emphasis on a fund's record during brief time periods, it's understandable why they'd be curious to see how their funds are holding up this year. With the market sliding, doesn't it make sense to see how well funds are weathering the storm?

Yes, it does. After all, in many cases, a key factor for a fund's long-term success is how it fares during the inevitable reversals, not just how it does during good times. And even if it might be advisable for a true long-term investor to avoid checking in too often when the skies darken, who am I to tell people that they shouldn't take a peek at their fund's recent returns when I can't help doing so myself?

So go ahead and look--but be sure to keep things in perspective. It's not just that short stretches are of limited importance for long-term investors; just as critical is the fact that year-to-date rankings can--and often do--change dramatically over a matter of days or weeks. In fact, the fund that you're thinking of dumping because of its sorry showing can end up much, much higher in the rankings just a short time later.

What a Difference a Dollar Makes
In the past few weeks, the U.S. dollar has suddenly stopped being the world's punching bag. The quick, sharp gains made by the dollar against most major currencies have had marked effects on the rankings of a few funds that hedge the majority of their foreign-currency exposure into the greenback. At the end of July 2008,  Tweedy, Browne Global Value (TBGVX) lagged other foreign small/mid-value funds badly for the year to date--in fact, it was in the 93rd percentile. That seemed quite an indictment, considering that the fund hadn't exactly torn up the track in the past few years, either. But just three weeks later the picture had brightened dramatically. With the dollar rising, this fund is now in the 27th percentile for the year to date through Aug. 20.

The same thing happened with  Mutual European (MEURX), which also typically hedges most of its currency exposure. At the end of July, it stood in the 50th percentile of the Europe-stock category. Just three weeks later, it's now in the 4th percentile.

In Mutual European's case, it also benefited--relatively speaking--from the reversal of fortune for the Russia-oriented funds in the compact Europe category. ING Russia , for example, was in the 12th percentile at the end of July. Three weeks later, it's 86th. The decline in oil prices--energy companies make up roughly half that fund's portfolio--had a huge impact, as have various political factors leading international investors to sell their once-hot Russian holdings.

It's worth noting, meanwhile, that while Mutual European's ranking has changed for the better, its return hasn't: The fund actually has a deeper year-to-date loss now than it did at the end of July. Its recent decline simply has been less pronounced than the nose dives suffered by category rivals. That twist is one more reason to look carefully before putting much weight on the rankings.

A Crude Reversal Puts the Shine on This Fund
The oil-price drop has had similar effects elsewhere.  Meridian Growth (MERDX) was in the 78th percentile of the mid-growth category at the end of June. Amazingly enough, it's now in the 8th. In the first half of the year it was held back by having scant exposure to energy stocks, even by comparison with its growth-oriented peers. With the price of oil plummeting, that has turned into an advantage. Not only did a relative lack of such stocks help out, the oil story also provided a boost to some of the companies in this fund's relatively concentrated portfolio. For example, the stock price of  Royal Caribbean Cruises (RCL) collapsed until mid-July; since then it has staged a nice rally.

A Distinction without (Much of) a Difference
Another thing to keep in mind when looking at this year's rankings is that large distinctions aren't necessarily as meaningful as they seem. For example,  Julius Baer International Equity (BJBIX) currently sits in the 62nd percentile of the foreign large-blend category, while sibling  Julius Baer International Equity II (JETAX) is in the 27th. Now, the two funds do have slight differences--the latter doesn't buy small-cap stocks, while its older sibling has a small collection of them. But they have the same manager and strategy, and their portfolios overlap to a huge extent. So, why the big difference in performance? Answer: There isn't a big difference after all. The older fund has a 20% loss for the year to date, while its sibling is down a nearly-as-unpleasant 18.4%. When returns in a category are tightly bunched, a relatively minor gap can be magnified into a misleadingly larger difference in the rankings.

In short, while it's worth looking at how funds perform during shorter periods if those time frames are relevant--such as a sharp downturn--be sure to take as much information as possible into account before reaching any conclusion. And even then, keep that in a much broader and more important context: the fund's longer-term performance, strategy, ability of the manager, cost, and fit in your overall portfolio.