Beware Mutual Fund Return Data

We’re in one of those periods when you have to be very careful when evaluating mutual fund performance data. Most funds report three-year and five-year data. Tha means the data won’t include the pre-crisis period and includes only returns from the bottom or near it. It also consists of returns that were influenced by the extremely high levels of fiscal and monetary stimulus.

That means first that returns for most stock fund managers will be quite high. But also keep two things in mind. Since the Fed was manipulating and stimulating the markets, absolute and relative returns don’t tell you much about a manager’s skill. The fund simply was riding the Fed’s wave. Related to that is the returns don’t tell you anything about a fund’s risk management. When the Fed is supporting and manipulating markets, investors who take the most risks are the big winners. Investors who pay attention to fundamentals and are limiting their shareholders’ risks will lag the indexes and probably the average fund. It’s been a good period for risk taking. That doesn’t mean that the risk takers of the last five years are the ones you want managing your money for the next five years.