I was reading the local paper this past Sunday. Yes, I am the one person that reads the paper. Actually I read my dad’s paper. That might be worse but I digress. In the Sunday Business section there was a listing of the 25 biggest mutual funds. (I would link you to it but I can’t find it online on the newspaper’s website)
For those who didn’t know the largest mutual fund (excluding money market funds) is Pimco Total Return Institutional(PTTRX). The simple reason it is the largest is because it’s the largest bond fund so it didn’t suffer from the huge stock market losses in 2008 and early 2009. The chart in the newspaper lists the 5 year percent return. So I went through and pulled out the top performers according to this number. I got Pimco Total Return Institutional (PTTRX), American Funds Capital World Growth & Income (CWGIX), American Funds EuroPacific Growth (AEPGX), Dodge & Cox International Stock(DODFX) and American Funds New Perspective (ANWPX). I later dropped DODFX from the conversation because there is no 10 year return numbers that I was looking for. Funny that 3 American Funds for top performers, I guess their reputation is well earned. Is this another topic for active versus passive? I won’t go there now.
So why did I pull these 5 (now 4) funds out? I wanted to look at their rates of returns to see what these numbers mean.
| PTTRX | 5-year | 5.16% | $12,860.89 |
| 10-year | 6.23% | $18,308.66 | |
| CWGIX | 5-year | 7.13% | $12,139.17 |
| 10-year | 9.13% | $19,226.12 | |
| AEPGX | 5-year | 8.22% | $12,498.83 |
| 10-year | 8.74% | $16,255.88 | |
| ANWPX | 5-year | 4.73% | $10,996.35 |
| 10-year | 6.89% | $15,041.93 |
Now my disclaimers about these numbers that you should know. What I did was take the annual returns for each of these funds over the time frame. So for 10 year it runs from 1999-2008 and for 5 year numbers it runs from 2004-2008. The newspaper included year-to-date performance that I through out to make the analysis easier. I also didn’t account for any sales loads, which of course American Funds has and thus, might eliminate them from being top performers depending on the structure of the account. Also in the last column I looked at what $10,000 would have grown to over that time period. Now this is dollar value using the annual performance numbers for the funds.
Now let’s look at what we can get from this chart. Did anyone think that a 5% rate of return could beat 7% or even 8% rate of return over 5 years? I didn’t think so. How about a 6% rate of return beating an almost 7% or almost 8% rate of return over 10 years? This is pretty eye opening isn’t it.
So what does this mean? I would love to hear your opinions. What does this mean to you? What do you think it means to investment or financial people? How does this affect you? Hopefully, I’ll get some good answer and I can’t wait to chime in.
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{ 4 comments… read them below or add one }
um, you got something wrong there.
Let’s assume the annualized rates of return you have there are gross of other expenses; as you point out, there may be assorted sales charges on the funds you have picked.
And, the $ value you have there, we’ll assume is given as an after-fee number. Why do I assume this.
Well, let’s look at the 1st fund there, earning a 5.16% return. To compound this rate of return, you multiply it by itself 5 times for the 5yr return, thus: (1.0516)^5 = 1.2860 times by $10k and you have your $12,860.
Let’s look at the next fund, with a 7.13% annualized return. Again, 1.0713 times itself 5 times, is 1.4131; not 12139. the explaination is that an investor in that fund would have paid $1992 in “fees” somewhere.
Conclusion, either the rates of return are GROSS of fees and the $ figures are net, or something of that ilk, or you simply pulled incorrect data for your table.
Paul
I love it when people look into my math, I’m only human. However, that’s not how I calculated the dollar value. What I did is take the annual return for each you and calculated it that way. So for instance CWGIX had a 7.13% average annual return over 5 years. The annual returns were: 19.42%, 14.72%, 22.36%, 17.52% & -38.38%. So when I took $10,000 and this series of returns the dollar value was $12,139.17. I did these simple calculations in excel and got the performance numbers from http://finance.yahoo.com/q/pm?s=CWGIX
I hope that helps explain it. Thank you for your question and please let me know if you have any more.
Ok, well I hate to debate with you. (no, really i don’t).
First, you ain’t no finance professional.
Second, you cannot take an arithmetic average of percentage returns and get the average return. If you do, and then you compound the arithmetic average you get bizzare results.
To get an average of the numbers you put up, you add “one” to the percent then MULTIPLY the numbers to and take a ROOT to get the geometric average.
So, in your example, the average compounded retturn for CWGIX using your data above is 3.95% NOT 7.13%. So, now we know how CWGIXs growth of a dollar underperformed the other funds.
GEEZ.
You’re making my point!
Great! I hope people were able to follow along and understand that walkthrough. I guess I was hoping I wouldn’t get bashed along the way but I put myself out there. The point of this blog is to educate and teach people about misinformation in the financial world. I think the arithmetic average is a great example of misleading information that is being shown/pushed around when performance is calculated. It is not accurate and thank Paul for pointing that out so nicely.
Here is a link to a great investopedia article talking about the differences: http://www.investopedia.com/articles/08/annualized-returns.asp
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