Time Helps Funds’ Performance

If you own a stock mutual fund that is more than 10 years old, expect to see a strong, if not spectacular, jump in its annualized total return numbers in November.

You can credit time, and not necessarily the acumen of the fund managers.

Mutual fund performance is usually measured monthly. So money invested Oct. 31, 1987, will show very different returns from the same amount invested just a month earlier. The reason is simple: the Oct. 19, 1987, stockmarket crash, when the market fell 22 percent in one day.

The differences can be surprisingly high. For example, the unmanaged Vanguard 500 Index Portfolio had an average annual return of 14.04 percent from Sept. 30, 1987, to Aug. 31, 1997. But from Oct. 31, 1987, to Aug. 31 of this year, it had a 17.05 percent annualized average return. The cash difference: $10,000 invested on Sept. 30, 1987, would have returned $36,799, while the same amount invested just a month later would have brought you $47,014.

It also means that the so-called “mountain charts” - those graphics that show how much a $10,000 investment has grown - will look a lot better for funds with 10-year histories. That covers only about 20 percent of all stock funds - reflecting the explosion of funds in recent years - but it includes most of the giants, such as Fidelity’s $62 billion Magellan Fund, Vanguard’s $46 billion index fund and American Century’s $22 billion 20th Century Ultra.

The pre-crash numbers are probably more important for new investors and those who like to invest on their own, because they need to know how funds performed in down markets - and there have been few of those since the 1987 crash, Phelps said.

“Since not that many funds are going to have 10-year numbers,” he said, you should also look at the seven-year returns, which will include the 1990 bear market. The Dow dropped 15.5 percent from August through October that year.

Phelps suggested that if your fund does not go back to 1987 or 1990, you might want to look at a similar fund or index fund in that category, one with a longer history, to get an idea of how your fund might do in a down market.

“The key is to keep the three worst months of 1987 so people will know how the funds performed, because it hasn’t happened in so long,” Lipper said.