How to Look Behind Mutual Fund Performance Numbers


If you are a mutual fund investor, it’s hard to resist peeking at those performance reviews published every year – the ones that list the top-performing funds. Perhaps you’re hoping that your fund will be among them, or you may be seeking new investment ideas. In either case, mutual fund performance statistics can be useful.

But do you know how to look “behind the numbers” to see the real story of a mutual fund’s performance? It’s more intricate than the simple rate of return numbers. When you understand how to look at the whole performance picture, you’ll be in the best position to answer important questions about selecting funds you’d like to invest in, such as: 1) How did the fund achieve its performance?; and 2) Does the fund’s performance justify the risks taken?

Mutual funds don’t run themselves. Actively managed funds hire professional managers who develop investment strategies and make specific “buy” and “sell” decisions. The performance data is, in effect, the fund manager’s scorecard. However, the manager may be doing a good job, even if the scorecard doesn’t look great at first glance, and the opposite also can be true.

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Three Critical Questions

To look behind the numbers, investors should ask three questions during any performance analysis:

  1. How active or passive was the manager’s strategy?
  2. Did the manager’s performance more than justify the fund’s risk exposure?
  3. How did the manager perform against its “peers”?

Active versus Passive – An index fund is considered totally passive. Its investment decisions are made using a formula that’s designed to match the composition of the fund’s benchmark, like the S&P 500® Index. On the other extreme are highly active strategies in which managers pit their insights, wits and skills against the market. (These are non-index funds.) What most investors don’t realize is that there is a spectrum of semi-active or semi-passive strategies in between these two extremes. In today’s competitive mutual fund industry, some fund groups specifically target how active or passive they want their managers to be.

Risk versus Return – If you are evaluating performance over decades, you can afford to focus on returns more than risks. But most performance reviews rank funds based on periods of one year or less. In these cases, it’s important to take risk into account in evaluating the fund’s short-term returns, because the fund that is “hottest” in an up market is a good candidate to be coldest when the market turns down.

Performance versus Peers – Check to see how the fund’s performance compares with its “peers” – i.e., the performance of other funds with similar investment objectives. Two analytical services, Morningstar and Lipper, divide mutual funds into categories and then rank managers based on either risk-adjusted (in the case of Morningstar) or raw (Lipper) returns.

One of the best ways to check a fund’s performance and ranking is to visit and access a free “Quicktake” report on the fund by typing in its name or symbol. Or, you can ask a professional financial professional to help you access and interpret this valuable information.

The bottom line is this: Past performance is no guarantee of future results. That’s why many financial professionals caution against “chasing returns,” since a fund that performed well over any given time frame often does not continue to perform in the same way moving forward. You may wish to consult a financial professional, who can help you identify mutual funds that match your needs for specific investment styles or risk tolerance, as well as funds that have consistently produced attractive risk-adjusted returns over time.

Prepared by The Guardian Life Insurance Company of America. The information contained in this article is for general, informational purposes only. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation. Mutual funds are sold only by prospectus.  Consider the investment objectives, risks, charges and expenses carefully before investing.  The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional.  Be sure to read the prospectus carefully before deciding on investing.

Russ has been working in the financial services industry for nearly two decades and has developed a broad base of knowledge as a result of serving the needs of individual people, families, small business owners and large institutions.

As a Financial Representative of Northeast Planning, Russ is driven by his sincere desire to empower people to take charge of their financial lives by helping them identify and  implement rational and proven, yet often underutilized, financial strategies that are aligned with their short and long term goals and desires.  He is a licensed securities industry representative, registered investment advisor’s representative and is a licensed life and health insurance producer in numerous states giving him a broad and balanced perspective into the financial services industry.

Phone: 908-709.0020 ext. 233

The opinions expressed herein are the writer's alone, and do not reflect the opinions of or anyone who works for is not responsible for the accuracy of any of the information supplied by the writer.

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