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Fortunately for mutual fund companies, they don’t have to parade out all their ugly classmates — the ones with the one-star gowns. While regulators, especially the Association for Investment Management and Research (AIMR), pay enormous attention to how investment advisers report their performance results to insure consistency, there is little attention paid to the mutual fund beauty queen pageant. The poor average investor doesn't have much to go on. He or she can only listen to the touts of mutual fund company marketers, or track the selected fund-rating agencies that use past performance as the primary basis for higher fund ratings. Investment News, a weekly newspaper for financial advisers, took an important step towards honest reporting on mutual fund performance when it arrayed the largest 25 fund companies by average U.S. diversified equity return. The latest report for the twelve months ending March 31, 2003, is quite revealing. Over the past three years, equity performance has been dreadful — comparable to the Depression-era stock performance of the 1930s. Yet, among mutual fund companies, there are a few important bright lights, according to the data presented in the May 12, 2003, edition of Investment News. The year 2003 was the worst in the past three years for equity fund performance. The best-performing fund company last year (ending March 31, 2003) was American Century Investments with an overall loss of 21.8 percent. In contrast, the worst-performing mutual fund company was Morgan Stanley Investment Advisors Inc. with a loss of 28.12 percent. The performance spread among the 25 mutual fund company equities was only 6.32 percentage points, not a big spread for only one year of performance. For the year 2002, the results were quite different. The best-performing fund company was T. Rowe Price with an overall equity gain of 11.02 percent, while the worst-performing fund company was MFS Investments with a loss of 3.86 percent, a spread of 14.88 percentage points — more than twice the spread of 2003. For 2001, the best-performing fund group was Lord Abbett with a loss of 2.21 percent, while the worst-performing fund company was AIM Distributors with a loss of 31.11 percent. The spread was even wider at 33.32 percentage points. What was the three-year average performance for the 25? The best-performing fund group over the past three years was Lord Abbett with an annual average return of -6.36 percent, while the worst-performing fund group was AIM Distributors at -19.72 percent. The three-year spread was 13.36 percentage points per year! The average return for the group was a -13.28 percent. This analysis does not purport to offer insight as to the selection of a mutual fund company’s equity mutual funds for investments. However, the results do demonstrate that overall mutual fund company performance can vary substantially — or not — depending on the particular period analyzed. These results also suggest that regulators ought to require some type of performance reporting standard such as the combined data of all equity performance within a mutual fund company. This would provide average investors with an idea of how well the overall fund company is doing. The three-year bear-market winner is clearly Lord Abbett, a mutual fund company that prefers to advertise the beauty queens. They have more to offer as a mutual fund company based on this analysis. On the other hand, AIM appears to have some work to do. —
Tom
Nugent is Executive Vice President & Chief Investment Officer of PlanMember
Advisors, Inc., and an investment consultant for Wealth Management
Services of South Carolina. |
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utual fund
companies love to advertise … performance. Each day as I read the Wall
Street Journal, watch CNBC, or page through some investment publication,
there they are — the mutual fund beauty queens all dressed up in
their five-star gowns. Sometimes the gowns fit for three months, sometimes
for one year, other times for three years or five years. It all depends
on when the beauty contestants look their best. 
