Rolling returns offer insight into your fund (from Morningstar)

This article, originally appearing in Morningstar, offers suggestions on using rolling returns as an indication of a fund’s full performance history beyond the last quarter.

Investors watch performance closely, with the past one- and three-year periods typically nabbing the bulk of their attention. There’s a strong link between the amount of money rushing in or out of a fund and how well it performed in the past 12 or 36 months. Yet the most recent year is no more or less important to consider than any 12-month period (or any trailing period for that matter) during a manager’s history running a particular investment style. But because the trailing returns ending last month or last quarter are easy to see in account statements and online, they hold a special spot in recent memory and impact behavior–a phenomenon commonly referred to as recency bias.

Rolling returns offer a useful lens into a fund’s fuller return history and can help investors see through the haze caused by the latest data. By looking at rolling returns, investors can gain a full appreciation for how a fund’s returns stacked up at any point in time, not just through the latest month or quarter-end. For example, a fund’s current trailing three-year return spans from October 2008 through the end of September 2011–just one discrete period that includes some of the worst months ever for stocks. With rolling returns, however, an investor can look back 10 years or longer to see how a particular fund stacked up in every three-year period throughout its relevant history, encompassing a wider range of market types.

Judged through the rolling lens, some funds that currently appear at the top of their game look less noteworthy: Over time, they’ve had trouble sustaining an advantage. Meanwhile, others that wouldn’t otherwise stand out are revealed as amazingly consistent. T. Rowe Price, for example, has plenty of funds that are consistently strong and steady, though not typically chart toppers over shorter stretches. Many of the firm’s funds are able to lock in top quartile long-term results not by beating their peers by large margins over short stretches, but by keeping ahead consistently while more inconsistent rivals pop in and drop out of the rankings.

Take T. Rowe Price Equity Income PRFDX, for example. Brian Rogers has managed the fund since 1985. Over 36-month rolling periods spanning Rogers’ 26-yearlong tenure, it has landed in the top quartile of its category only 22% of the time, but in the top half a more impressive 75% of the time. Notably, the fund has rarely landed in the bottom quartile (less than 2% of the time), so it hasn’t had to post stellar returns just to pull itself out of any slumps; it tends to avoid the big slumps altogether.

CGM Focus CGMFX has a drastically different return profile from Equity Income. When it’s hot, it’s really hot. And when it’s cold, it’s bitterly cold. Over long stretches, CGM Focus has locked in returns that are hard to beat. From its inception in 1997 through the end of September, the fund has gained a cumulative 305% versus the S&P 500’s gain of 53%. In fact, over every rolling three-year period spanning its entire 14-year history, the fund has landed in the top quartile of its peer group 80% of the time: A record that’s hard to match.

Despite CGM Focus’ success, many investors have failed to benefit because the ride is incredibly rocky and its shareholders haven’t proved patient. Over rolling 12-month periods throughout its history, the fund splits its time between the top quartile and bottom quartile of peers. And, in an absolute sense, the fund has posted tremendous gains that attract new investors and has followed those hot runs with large losses. The fund gained 80% and beat 99% of large-growth funds in 2007, for example, and lost 48% trailing behind 96% of peers in 2008. Only investors willing to stick around for many years following the dips are able to experience the fund’s benefits.

Finally, some funds fail to distinguish themselves, and the problem is persistent. Robert Hagstrom founded and has managed the Legg Mason Capital Management Growth LMGTX since 1995. He put up strong numbers in the late 1990s but has not been able to amass a reliable advantage since then. The pattern is clear when you look at rolling returns. The fund has outperformed the average large-growth fund in only 74 out of 162 rolling three-year periods since its launch in 1995, and most of those periods came in the first several years.

While our fund analysts frequently discuss rolling returns in their analyses of various funds, you can view rolling returns for any fund yourself.  To see the graphs, go to a fund report on Then click on the Performance tab and look for “Customize Interactive Chart.” Within the chart, you can switch from “Growth” to “Rolling Returns.” You might be surprised at the stories those graphs tell.

About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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