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Performance
Defined in the dictionary as the execution of an action, or better, the fulfillment of a promise, claim or request, it is at the heart of your choice of mutual funds. You are interested in other things about the fund such as the investing style, the management team, and the fees they charge you for their services. But what catches your eye is how well they have done in the past.
This year especially, the yardstick you use to measure performance is coming under closer scrutiny as fund managers try to paint a prettier picture of the tattered landscape of performance. This a land of downward pointing arrows and negative signs. Finding something that did worse than your fund, and using it as a point of comparison is of the utmost importance to the fund manager.
One way to do this is to use averages. If a fund can find an average that makes them look good, then they will not hesitate to use it. Even the folks who did the worst of their peers can find something out there to compare themselves with that makes them seem not so bad.
A fund that compared itself to the wrong index might actually look good if you are not looking close enough. There were enormous spreads between good and bad this year, more than in recent memory. How do you judge?
The first thing you are faced with is the average annual total return. It is the change, usually done in percentages, of the value of the fund over the previous years performance. This takes into account such occurrences throughout that time period as distributions, dividends, interest payments, and all of this usually is based on a reinvestment of any income the fund may have generated during that time. That would be income dividends and capital gains distributions.
You can calculate a simple total return on your investment, you have to assume that you did not reinvest your dividends (which is money paid by the company whose shares you fund holds) and distributions (which are the income the fund has generated form the selling of securities in the fund. If they sold shares at a profit, you pay taxes on those gains, you pay fees for the management, and all of this is deducted from any losses). So without reinvestment of those two things, you can calculate your return.
For example, suppose you ended the year with a total of $1500 worth of shares from an investment of $1000. During that period, you received a distribution of $250 which for the sake of this example you did not reinvest. You add the difference between the ending share price and the distributions for a total of $500. This number is then divided into the original investment. If you are trying to calculate yield, and fund holders do this if they are using the fund to generate current income, divide the distribution by the investment and you will receive the yield. Now to judge the performance of your fund, you have to determine whether your fund manager has compared himself to the right group of peers or indexes.
(To see the Frank Russell Company list of performance indicators, click here and then click on the Index returns) The point of this, is merely whether your fund manager is telling you the whole truth about what transpired last year. Showing themselves in a favorable light is human nature, but when it comes to managing your money, it might be taken as nothing more than deceptive.
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