Jeff Benjamin

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As 2008 fades, five-year fund performance shines bright

Déjà vu all over again for investors, fund marketing departments

Dec 18, 2013 @ 9:28 am

By Jeff Benjamin

Thanks to the magic of time, five-year average returns for equity mutual funds are looking better by the month, and financial advisers should prepare to hear plenty about it.

As the carnage of the financial crisis that included a market bottom in March 2009 continues to recede beyond the five-year mark, past performance track records are likely to become a fresh new selling point and possibly more fuel for the stock market run.

“We're already seeing some of it because the three-year numbers look better, and money is going into equity funds,” said Don Phillips, president of research at Morningstar Inc.

“When we look at the five-year numbers now, we're only seeing a bull market,” he added. “Of course, 2008 will still be included in the 10-year numbers, but that's a longer period so it's more diluted.”

Through November, the five-year rolling average return for domestic equity funds was 18.6%, which is up from a 15.8% rolling average through October, and 10.3% through September.

Prior to September you have to go all the way back to May 2008 to find a five-year rolling average above 8.5% for the category.

The further illustrate the impact of the financial crisis on rolling average returns, consider that the five-year monthly rolling average was a negative number from October 2008 through June 2009.

And from October 2008 through February 2010, the rolling five-year average got above 1% only twice.

The story is similar, but not quite as extreme, for international equity funds, which have a five-year rolling average of 14.7% through November, up from 13% through October, and 6.8% through September.

The fund industry is well aware of how much weight investors and financial advisers give to performance screens, especially when the time periods reach the five-year mark.

“Getting past 2008 cleans up those performance numbers and makes them look at lot more flattering,” Mr. Phillips said. “The fund companies will leverage that, and the people in those marketing departments will be pushing to get those numbers out there.”

Of course, it isn't like this hasn't happened before.

“We saw the same thing after 2001 market downturn,” Mr. Phillips added. “Everyone got bullish and started investing again in 2006 and 2007 just in time to be fully engaged for 2008.”

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