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The Short Answer

Get Rolling When Assessing Fund Performance

Rolling-returns data provide a more comprehensive view of a fund's track record than other measures can.

Question: I often hear Morningstar analysts refer to a fund's rolling average performance during various time periods. Where can I find this data on Morningstar.com?

Answer: The charting tool featured on individual fund pages on Morningstar.com allows users to see how a fund has performed during various time periods in terms of the growth of a $10,000 investment, price appreciation, or rolling returns. But before we explore the last of these measures, let's first explain what we mean by "rolling returns" and how they differ from more widely used return metrics.

The Problem With Trailing and Calendar-Year Returns
In their marketing materials,
fund companies often use trailing-return data for various time periods (year to date or annualized returns during the past one, three, five, or 10 years). These data can also be found on fund pages on Morningstar.com, under the Quote and Performance tabs, and show a fund's yearly average total return during the time period in question. The problem with trailing-return data for longer time periods is that it can hide performance aberrations and volatility.

To use a simplified example, let's say we want to compare the five-year performances of imaginary Funds A, B, and C. During the course of five years imaginary Fund A has delivered annual percentage returns of 20, negative 30, 40, negative 10, and 20; imaginary Fund B has delivered returns of 0, 20, 0, 20, and 0; and imaginary Fund C has delivered returns of 8, 8, 8, 8, and 8. Obviously the roads traveled by these three funds are dramatically different. Yet the five-year annualized return for all three would be the same: 8% (note that this example does not take into account the effects of reinvested dividends, which are included in annualized returns found on Morningstar.com). This single data point gives no indication of the volatility or consistency of the funds' performances even though most investors would clearly prefer the fund with steady-as-she-goes returns rather than a more volatile investment.

Likewise, calendar-year returns provide a good snapshot of how a fund performed at a given time, but it can be difficult to draw a conclusion as to how it performed in aggregate merely by looking at a string of yearly performances. Plus, calendar years essentially use an arbitrary cutoff as to when a fund's performance starts and stops. For example, let's say two funds deliver identical performances during a two-year period, but one has a strong December the first year followed by a weak January while the other has a weak December followed by a strong January. Over the two-year time frame in question, the funds' performances are virtually the same. Yet because of when each experienced its strong and weak months they appear to perform quite differently.

Viewing Historical Performance in Slices
To circumvent these problems in assessing fund performance, analysts often turn to rolling-return data, which look at a fund's performance during multiple overlapping time periods. For example, instead of looking at how a fund performed during just the most recent three-year period, rolling return data would allow one to look at its performance during the course of more than 80 overlapping 3-year periods during the past decade. (The length of the rolling time period and the overall time period examined can be adjusted as needed.) 

This approach is particularly useful as a way to analyze performance consistency without recent performance or unusual events skewing the data. For example, let's say a concentrated fund's top holding tanks. As a result, the fund's trailing annualized performances are weighed down by this near-term event. Investors will no doubt like to know that the fund can take a periodic tumble. But by looking at rolling returns over time, one can get a better picture of how the fund has performed without a recent misstep skewing the data.

Likewise, let's say you wanted to see how a fund performed not just during the five years since the market meltdown in late 2008 but during other five-year periods throughout its history. Rolling-return data allow you to do that.

Rolling returns can also be useful as measures of fund risk--in particular, the risk that it will lose money during a given time frame. Let's say you want to make sure a fund is unlikely to lose money during the next three years because you expect to need the money for a home down payment. By looking at the fund's rolling three-year returns you can see if this has happened in the past. Of course, even with rolling returns, one has to keep in mind that past performance is no guarantee of future results.

How to Find Rolling Returns on Morningstar.com
So now that you know how to use rolling returns, let's take another look at the fund page charting tool, which can be found by clicking on the Chart tab or by clicking the More button to the upper right of the chart on the Quote page. The tool default setting shows the growth of a $10,000 investment in the fund over time, but if you click on the drop-down menu that says Growth you'll find another option that says Rolling Returns. The default setting shows the fund's performance during rolling three-month periods for the previous 10 years.

So, for example, if you were looking at rolling-return performance for  Vanguard Wellington (VWELX), the default setting would show you how the fund performed during the course of 117 rolling three-month periods dating back to 2003. But if you wanted to look at how it performed during rolling periods of a different length of time, all you have to do is choose one from the drop-down menu next to the label that says Rolling Period. So a Vanguard Wellington shareholder, or prospective shareholder, who expects to need money he has invested or would invest in the fund in five years could look at the fund's rolling returns during the past decade and note that it has lost money only once (March 2004-March 2009) in 60 five-year periods. You may also notice that rolling-returns chart ends in mid-2008 because that's when the most recently completed five-year rolling period started.

In addition to changing the rolling period, the overall span of time to be analyzed can be changed by clicking on the various time-period options to the upper right of the chart or by filling in the date boxes to the upper left. So if you wanted to see how Vanguard Wellington has performed compared with the moderate-allocation category average during rolling five-year time periods since 2000, you would click on the Chart tab on the fund page, select Rolling Returns in the first drop-down menu, choose a Rolling Period of 60 months, and choose Jan. 1, 2000, as your starting date. You would find that the fund has easily beaten its category average in every rolling five-year period since 2000.

The bars on the chart represent the fund's percentage gain or loss for the rolling period starting at the beginning of each month, while colored lines represent the performance of the fund's category average and benchmark. You can add benchmarks or other securities by using the Benchmark drop-down menu or the search box at the top of the chart. Point to any bar on the chart and the data and time frame display on the key above the chart.

When evaluating fund performance it's easy to focus on trailing returns, which get most of the attention. But for a fuller picture of a fund's past performance in both absolute and relative terms, rolling returns can be an invaluable tool.

Have a personal finance question you'd like answered? Send it to TheShortAnswer@morningstar.com.

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