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When investment performance is too good to be true

Morningstar reported a Great-West Financial bond fund returned 7.1% in the third quarter— except it didn't

Oct 10, 2018 @ 12:02 pm

By Jeff Benjamin

While past investment performance should never be interpreted as an indicator of future returns, a rare snafu involving the Great-West Multi-Sector Bond Fund (MXUGX) shows that sometimes past investment performance isn't even an indicator of past returns.

Last week, when InvestmentNews sent out a data request to Morningstar for a list of the top-performing bond funds during the three months that ended Sept. 30, the $675 million Great-West fund topped the list with a stunning 7.1% return.

The next best performer on the list was the $43 million Western Asset Emerging Markets Debt Fund (LMWDX), which posted a 4.3% gain during the third quarter.

Getting to above 7% for a bond fund over that period would have required allocations deep into the junk bond jungle, entailing the kind of risk rarely seen or expected in a multisector bond fund. For perspective, consider that Morningstar's multisector bond fund category gained about 20 basis points in the third quarter.

The reality, which was brought to our attention by Great-West, is that the Great-West fund gained 1.14% during the quarter. Oh, and the fund also had only a little more than half of the $1.15 billion under management that Morningstar reported.

"Our internal audit and review discovered that incorrect data was reported to Morningstar," Great-West Financial spokesman Stephen Gawlik said in response to the incorrect performance reporting.

Mr. Gawlik said that the incorrect performance did not appear on the Great-West website and that "we've added a new control to this reporting process to prevent future mistakes."

For its part, Morningstar's data team said the incorrect fund information "was identified and fixed within the allotted three business days as is our goal and policy," according to spokeswoman Sarah Wirth.

"Restatements can happen but it's an infrequent occurrence in comparison to the hundreds of thousands of [net asset values] per month that we process," she said.

Morningstar might be feeling a bit humbled about now, but even its competitors acknowledge that such breakdowns are possible, and that investors and financial advisers should always be skeptical of outliers in the data.

Tom Roseen, head of research services at Lipper, said performance numbers are typically calculated by the third-party firms based on data gathered from Nasdaq and the fund companies.

"We do all the quality assurance because when they send it over, we don't trust the Nasdaq or the fund companies to calculate performance," he said. "We do comparisons within the funds, looking for outliers."

"I know Morningstar also challenges them, but ultimately we have to believe what the fund companies tell us," Mr. Roseen said.

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said he was "surprised that the fund company appears to be taking the blame for this." CFRA gets its fund performance data from Lipper.

"We're at the mercy of Lipper getting clean data from the fund companies because total return is not calculated by the fund companies," Mr. Rosenbluth said.

Morningstar said the Great-West fund's performance was corrected in the window "before the month-end sign-off and thus, there was no impact on the fund's [four-star performance] rating."

We may never know if the fund's inflows were affected by the briefly inflated performance data.

"Rightly or wrongly, we know that investors put money to work where they see success," Mr. Rosenbluth said.

Like Mr. Roseen, Mr. Rosenbluth admits that accidents happen, and he doesn't want to rake a competitor over the coals. But when a 1.14% return is reported as 7.1%, questions will be raised about the way data are gathered and verified.

"I've been tracking funds for over 15 years, and I can't recall an instance like this," Mr. Rosenbluth said.

For advisers, the takeaway can be summed up in a couple of clichés: If something looks too good to be true, it probably is. And, borrowing the old journalism school adage about verifying everything, "If your mother says she loves you, check it out."


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