Why the calendar is making some advisers look smarter than they really are

Numbers don't lie, but boy can they be deceptive.
FEB 08, 2017
If you want to prove your genius to clients, today would be a good day, provided you use the most recent 12-month figures available to you. While it may seem like a distant, dark memory, the first part of 2016 was awful. The Standard & Poor's 500 stock index fell 11.2% from Dec. 31, 2015 to Feb. 11, 2016. Despite its awful performance, the blue-chip index managed to eke out an 11.96% gain for 2016, assuming you include reinvested dividends. The 2016 gain was certainly above average: Large-company stocks have averaged a 10.05% annual gain since 1926, according to Ibbotson Associates. But 12-month returns are dropping the January and early February doldrums, and adding a 2.6% gain for 2017. The result: Supercharged 12-month returns. As of Tuesday, for example, the largest stock ETF, Vanguard Total Stock Market (VTI), has gained 26.52% for the previous 12 months. Its 2016 record: 12.7%. The S&P 500 jumped 24.6% the 12 months ended Tuesday. For some funds and ETFs, the month-and-change difference in measurement time means the difference between rotten performance and excellent performance. Renaissance IPO ETF (IPO), for example, clocked a 0.2% loss in 2016. Its current 12-month gain: 29.4%. “The whole business of point-in-time measurements is so limiting and false,” said Dan Wiener, editor of The Independent Adviser for Vanguard Investors. “It's a horrible way to measure performance.” A better way is rolling five-year performance, Mr. Wiener said. Or better yet, use the relative performance of one investment against another measure of performance. Possibly the best example is the miserable performance of Vanguard Wellington (VWELX) in early 2000 vs. Vanguard's Balanced Index (VBINX). The fund had routinely outperformed the balanced index until then. “All of a sudden, things go haywire in 2000,” Mr. Wiener said. Tech stocks had gotten terribly overvalued, and Wellington, a value fund, hadn't participated in the tech bubble. When the bubble burst, Wellington once again started to outperform. So if you're thinking of bragging to your clients about your savvy fund-picking, you should probably note that the fund's peers have seen startling improvement in performance, too. And you might also note that your clients' funds are probably turning in gains that are well above their long-term mean – and that an adjustment might be due.
Looks can be deceiving
How the 25 largest diversified U.S. stock funds, ranked by assets, performed in 2016 and the 12-month period ended Feb. 7
Name Ticker 12 month return 2016 return Assets (Billion $)
Vanguard Total Stock Mkt Idx Inv VTSMX 26.40% 12.50% $517.94
Vanguard 500 Index Inv VFINX 24.50% 11.80% $292.36
Vanguard Institutional Index I VINIX 24.60% 11.90% $216.10
American Funds Growth Fund of Amer A AGTHX 28.40% 8.50% $152.05
Fidelity® 500 Index Investor FUSEX 24.50% 11.90% $111.43
Fidelity® Contrafund® FCNTX 21.40% 3.40% $104.00
American Funds Washington Mutual A AWSHX 22.80% 13.40% $87.30
American Funds Fundamental Invs A ANCFX 26.70% 12.50% $82.39
American Funds Invmt Co of Amer A AIVSX 25.10% 14.60% $82.20
Vanguard Mid Cap Index I VMCIX 28.10% 11.20% $79.85
Vanguard Small Cap Index Inv NAESX 35.00% 18.20% $71.91
Dodge & Cox Stock DODGX 38.10% 21.30% $61.60
Vanguard Growth Index Inv VIGRX 23.40% 6.00% $55.73
Vanguard Extended Market Idx Inv VEXMX 35.90% 16.00% $53.13
American Funds AMCAP A AMCPX 24.00% 9.00% $52.33
Vanguard Value Index Inv VIVAX 26.40% 16.70% $52.14
Vanguard PRIMECAP Inv VPMCX 29.20% 10.60% $49.52
Vanguard Windsor® II Inv VWNFX 25.10% 13.40% $47.28
T. Rowe Price Growth Stock PRGFX 25.70% 1.40% $46.97
American Funds American Mutual A AMRMX 21.70% 14.20% $42.09
MFS Value A MEIAX 22.80% 13.90% $41.34
Fidelity® Low-Priced Stock FLPSX 19.30% 8.80% $38.81
Fidelity® Total Market Index Investor FSTMX 26.50% 12.60% $38.24
Vanguard Instl Ttl Stk Mkt Idx InstlPls VITPX 26.60% 12.80% $37.87
Fidelity® Growth Company FDGRX 33.00% 6.00% $35.35
Average, 25 funds 2659.70% 1170.50% $98.00
Standard & Poor's 500 24.50% 12.00%
Dividends, gains reinvested. 12-month return as of 2/7/2017. Source: Morningstar

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