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Educational Programming Video

The Value Line Mutual Fund Survey
Program 5: Measurement of Mutual Fund Performance

Previously, we discussed how you can keep track of a mutual fund by defining Net Asset Value, dividends, dividend yield, and capital gains. In this session we discuss the measurement of mutual fund performance.

Every investment can be tracked in some way, shape or form. Mutual funds are tracked based on total return. This is academically defined as "a statistical measure of a security's performance for a specific period of time." Total return is expressed as a percentage, with higher numbers being better than lower ones.

For those of us who aren't statisticians, total return is the appreciation or depreciation of the underlying fund during a specific period of time (The difference between the current price and the price at which the fund was purchased), plus the sum of all dividends and capital gains distributions paid during the same period. Both dividends and capital gains distributions were discussed last session. Thus, a fund could have a total return of 10% even though its NAV only advanced 8% because the dividends and capital gains aided the fund's performance. Total return is always a trailing figure, based on historical performance. Although the measure is important, it is also important to remember that it is not necessarily predictive. You cannot expect the same performance in the future as in the past.

Time is also an important element when considering total return. For periods less than one year, such as 3 months or 6 months, total return is measured from the start of the period to the end. For periods longer than one year, however, the percentage is usually annualized. This means that performance is measured from the start of the period to the end of the period, and then broken down to an average yearly figure. So, if a fund has a 10% trailing 3-year return, it means that, on average, the fund returned 10% a year for that three-year period. Actual performance, however, could have been much more volatile. Indeed, the fund could have gone up considerably in the first year and treaded water the other two years, or it could have done just the opposite.

You can find information about past performance in a number of different places, including from the mutual fund itself, financial listings in newspapers, magazines or on the web, and research and advisory services such as Value Line.

Mutual funds themselves are an excellent source of information. They issue various reports—including those that the government mandates they provide. These reports include a prospectus and annual and semi-annual reports, which I will discuss in more depth in a latter program, as well as promotional material. The reports are available from the funds via mail and are usually available for download on the fund's web site. For now, however, it's enough to say that they are full of legal language and can be very confusing. You can also call a fund to find out performance numbers. Although calling every time you want to know about performance is OK if you own one fund, it would get a bit overwhelming if you owned say 10 funds.

The quick answer to calling every fund you own is to look up the information in one place, such as a newspaper or web site. Newspapers and magazines are OK for researching performance, but often you only get a select list of funds-smaller or lesser-known funds may not be included. In addition, many newspapers and magazines don't print comprehensive performance reports. And, most only provide in-depth analysis on a small number of funds. Although you can follow funds if they are listed, picking a fund using these services is very difficult.

So how should an investor go about studying mutual funds? The answer would appear to be the Internet. Or so everyone would have you believe. Web sites provide comprehensive performance numbers and some other important figures, but often lack deep insight into the fund's management style and recent developments. What you normally get is a watered down version of the legal language found in the fund's own literature.

This is where advisory services such as Value Line come into play. Value Line covers almost 1,500 equity mutual funds and over 500 bond mutual funds. Our pages, which are available online to subscribers, contain all the performance numbers you need to make an informed investment decision and provide in-depth analyst research.

One of the most powerful parts of The Value Line Mutual Fund Survey is our ranking system, which digests the numbers and helps you to sort through the thousands of funds we cover, to pick the right funds for you. And, once you have a list of candidates, you can use our insightful analyst commentary to help make your final choices.

That's all for now, next time we'll further discuss the research team here at Value Line, and highlight some of the things that we examine when looking at a fund.
