Mutual fund managers weary of trying to spin negative trailing returns are suggesting that investors look at rolling returns, but those are often difficult to obtain and can be misleading, some say.
One such manager is Christopher Davis of the Davis Funds, which is managed by Davis Selected Advisers LP of Tucson, Ariz.
The well-respected portfolio manager of the Davis Large Cap portfolios, who also serves on the research team for other Davis portfolios, suggested at the Morningstar Investment Conference last month in Chicago that financial advisers emphasize rolling over trailing returns.
Unlike trailing returns, rolling returns give an investor a better idea of how a manager performs during multiple market periods, he said at the conference sponsored by Morningstar Inc. of Chicago.
Mr. Davis didn't return phone calls seeking comment.
Skeptics, however, pointed out that rolling returns can mask abysmal trailing returns and volatility.
For example, as of last Wednesday, Class A shares of the $26.9 billion Davis New York Venture Fund A (NYVTX) were down 32.4% for the one-year period, ranking the fund in the 73rd percentile of its large-cap-blend category. It was down 8.96% for the annualized three-year period, ranking it in the 63rd percentile, and down 1.03% for the annualized five-year period, ranking it in the 39th percentile.
But by using rolling returns, Mr. Davis can claim that the fund has outperformed the Standard & Poor's 500 stock index over every rolling 10-year period since 1969.
Mr. Davis has long been a proponent of using rolling returns, so it is unlikely that his motivation for talking them up now is an effort to hide recent poor trailing returns, said Russel Kinnel, director of mutual fund research at Morningstar.
And for many funds, using rolling periods — particularly 10-year rolling periods — may only serve to highlight that they have underperformed their benchmark over time.
"SALES PITCH'
Nevertheless, industry experts said that funds managers who can are using rolling returns to a greater extent then they used to.
“I've noticed there are more people talking about rolling returns,” said Daniel Wiener, the Brooklyn, N.Y.-based chairman and chief executive of Adviser Investment Management Inc. of Newton, Mass., which manages more than $1 billion in assets. “If this is the first time they're talking about rolling returns, absolutely it's a sales pitch.”
The Vanguard Group Inc. of Malvern, Pa., is one asset manager that is mentioning rolling returns more often these days, said Mr. Wiener, who is also the editor of The Independent Adviser for Vanguard Investors.
But while Vanguard employs rolling returns during client presentations, company spokeswoman Rebecca Cohen said the firm continues to use trailing returns primarily in analyses.
There are good reasons to be skeptical of rolling returns, some say.
Because rolling returns are a snapshot of a fund's performance during a particular period, multiple periods are required for rolling returns to be statistically significant.
Add to that the opinion of some industry experts that to capture complete market cycles accurately, the periods themselves should be lengthy — between seven and 10 years. That means rolling returns are problematic for funds that have only a few years of returns under their belts.
“Rolling returns do give you some insight into what very long-term shareholders would have received,” said Jeff Tjornehoj, a Denver-based senior analyst with Lipper Inc. of New York. “The downside is you lose a lot of comparable funds.”
Another downside is that rolling returns may mask volatility.
“It strikes me that you would be rewarding more volatile performance” using rolling returns, said Mark Hulbert, editor of the Hulbert Financial Digest, an Annandale, Va.-based newsletter that tracks and analyzes other investment newsletters.
For example, the $970 million Heartland Value Fund (HRTVX) from Heartland Advisors Inc. of Milwaukee was among the 8.66% of 404 U.S. domestic funds that beat their benchmarks over all 10 rolling 10-year periods ended May 31, according to Morningstar.
But the rolling returns on the fund don't show what has been a wild ride.
Heartland Value lost a bundle last year, dropping nearly 40% and lagging nearly 90% of its peers, according to Morningstar.
THINKING LONG TERM
Tracking volatility, however, need not be so important when analyzing rolling returns.
“If I really get nervous about what the market will do over the next three months, then volatility is important,” said Jeff Cardon, chief executive of Wasatch Advisors Inc. of Salt Lake City.
But over a 10-year time horizon, a little short-term volatility shouldn't be problematic, said Mr. Cardon, manager of the $596 million Wasatch Small Cap Growth Fund (WAAEX).
The Wasatch fund was also among the 8.66% of U.S. domestic funds that beat their benchmarks over all 10 rolling 10-year periods ended May 31, according to Morningstar.
Another problem with trailing returns, however, is that they can be hard to find and compare.
“I think it winds up being difficult for most investors to get that kind of information,” said Reuben Gregg Brewer, director of mutual fund research at Value Line Inc. of New York.
Most data providers don't break out rolling returns.
Rolling returns do have their problems, but Mr. Wiener said that they are actually superior to trailing returns when it comes to evaluating fund performance.
“We're very big proponents of using rolling returns,” he said. “We've used them for years.”
And using rolling returns in conjunction with trailing returns can greatly help investors evaluate funds, Mr. Kinnel said.
“I would say there is a lot of value in looking at rolling returns,” he said.
E-mail David Hoffman at [email protected].
