5 Funds Whose Trailing Returns Don't Tell the Whole Story
The bull market in equities since the credit crisis has masked the volatility of these funds.
A version of this article was published in the April 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
Trailing returns serve as a useful tool to compare a fund’s performance with its benchmark or peer group. However, the measure often disguises how volatile a fund has been during a longer time frame. That’s especially true when a fund has recently turned in very strong or poor performance, which can bias its trailing returns.
On March 9, 2016, the U.S. equity bull market celebrated its seven-year anniversary. Many funds that struggled during the credit crisis have excelled during the rally and now boast excellent trailing returns relative to their Morningstar Category peers. Investors should keep in mind that these funds’ trailing returns don’t tell the whole story.
We’ve gathered funds from the Morningstar 500 that had bottom-quintile showings during the credit crisis yet boast top-quartile returns during the trailing three-, five-, and 10-year periods through March 2016. All of the funds represent strong long-term options. However, they require patience; each fund receives a Morningstar Risk rating of High or Above Average.
Morgan Stanley Institutional Growth (MSEGX) sports an impressive record, though investors have endured a few stomach-churning periods of performance during the last decade. Most notably, the fund lost 45.7% annualized and placed in its category’s worst decile during the downturn from October 2007 through March 2009. Given lead manager Dennis Lynch’s relatively concentrated, low-turnover, and sector-agnostic approach, investors should expect high volatility. Still, the fund remains an excellent pick for those willing to ride out the short-term bumps. The team won Morningstar’s Domestic-Stock Fund Manager of the Year award in 2013, and the fund receives a Morningstar Analyst Rating of Gold.
Investors in AMG Managers Skyline Special Equities (SKSEX) have also withstood heightened volatility. The fund lost more than half its value during the financial crisis, and it fell more than most small-blend peers in 2015, dropping 6.1% during the year. Nonetheless, thanks largely to outstanding results as the markets soared in 2009 and 2013, the fund’s trailing returns show no period of weakness relative to category peers. Morningstar analysts assign the fund a Bronze rating, indicating their belief that it will outpace the majority of competitors over a full market cycle, though investors should prepare for lumpy returns.
The team running Western Asset Core Bond (WATFX) and Western Asset Core Plus Bond (WACPX), which both have delivered strong long-term gains and receive Silver ratings, tends to take more credit risk than most rivals. As a result, both funds typically amplify the intermediate-term bond category’s movements. Both strategies lost roughly 10% as investors shunned credit risk in 2008, while the typical peer retreated 4.7%. During the next two years, the funds led more than 90% of peers with double-digit gains as lower-quality bonds rebounded. The team has recently improved its risk-management procedures, which seems to have helped: Both funds turned in peer-beating results during 2011’s turbulent market. Still, given their higher credit orientation, these strategies aren’t for the faint of heart.
Fidelity Capital & Income (FAGIX) is one of the most aggressive options in the high-yield bond category. Lead manager Mark Notkin often builds sizable allocations to junk-rated bonds, and he’ll even shift assets into equities when high-yield valuations look frothy. Generally aggressive positioning throughout the stock market rally has boosted results and led to excellent trailing returns. However, the past 10 years have been a rocky ride. Even with Notkin’s move to raise cash ahead of the credit crisis, the fund lost 32% in 2008; it also lost a near category-worst 11% in the rocky third quarter of 2011. With about 20% of assets in equities as of 2015’s end, the fund is vulnerable to a sell-off in the stock markets. That said, for investors with a high risk tolerance, it remains an appealing long-term choice, as indicated by its Analyst Rating of Silver.
Leo Acheson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.