Mutual fund performance data is quite useful, but you need the right perspective.

A version of this article originally appeared in Morningstar FundInvestor.



Short-term returns tell you something about when a fund prospers and when it loses money, but you have to go long to judge a manager’s skill. In fact, you should go as long as possible–the ideal range is from the time a manager becomes lead manager through the current date. Emotions tell us that the most recent results are somehow more meaningful, but science says you want as many observations as possible. Even the trailing 10-year returns are shedding the 2000-02 bear market.

A couple of years ago people wanted to throw in the towel on  Oakmark Select (OAKLX)after a stretch of poor performance and a mistake in its top holding. As Morningstar associate director of fund analysis Mike Breen pointed out in FundInvestor at the time, though, the fund was still miles ahead of the S&P 500 since its November 1996 inception. Indeed, the fund has come back, gaining 11.3% annualized versus 5.3% for the S&P 500 under Nygren. It turns out manager records are a decent predictor of performance.

A couple of bad years don’t worry us too much, but when a fund manager’s long-term record deteriorates significantly, we get worried.

Let’s take a long-term perspective on some long-tenured managers to see how they are really doing. In some cases, I found comforting reassurance in the strength of a manager’s record. In others, I found damning returns that make a compelling case against the fund. In all cases, returns are through end of 2011. You can check how a fund has done over the longest-serving manager’s record in the Fund Spy selector.

 Longleaf Partners (LLPFX)
Longleaf Partners has been remarkably consistent in its value approach. Dating back to 1987 when the fund was launched, Mason Hawkins and company have produced a 10.6% annualized gain compared with 8.6% for the S&P 500. That’s worth keeping in mind because its focused portfolio has regularly suffered bouts of underperformance. For example, it endured two bottom-decile years in 2007 and 2008 before rebounding for two top-decile years. Hawkins and Staley Cates have proved to be calm investors amid the storm who are better able to maintain their long-term focus than most.

 Marsico Focus (MFOCX)
Tom Marsico has produced a 5.5% annualized return versus 3.7% for the S&P 500 and the average large-growth fund. That’s encouraging in light of recent sluggishness, but I do have one long-term concern. Marsico bought his firm back from  Bank of America (BAC) with a chunk of borrowed money in 2007, and assets have shrunk considerably since then, making that debt service a real burden. The firm recently lost manager Corey Gilchrist, and I would imagine the firm’s problems make hiring more challenging.

The Best Versus Benchmarks or Categories
I took a look at the Morningstar 500 funds versus their benchmarks or category peers over each fund’s manager’s tenure through December 2011.  I ranked them by annualized outperformance. I limited the search to funds whose managers have at least five years’ tenure.

The Top Five Versus Benchmarks

 Matthews Asia Dividend Investor (MAPIX) leads the way with a 8.7% annualized return versus a 0.7% loss for the MSCI AC Asia Pacific Index and a 1% loss for its category peers. Jesper Madsen has done a fine job mixing caution and aggressiveness since November 2006. The only knock would be that he just made it in under the five-year cutoff, and it’s tough to sustain that outperformance over a longer period.

 Fairholme (FAIRX) is up 9.4% annualized compared with 0.6% for the S&P 500 since its December 1999 launch.That is a comforting reminder after a horrible 2011. And that figure doesn’t account for the strong bounce the fund received in early 2012. I’m pleased to see the big redemptions at this fund because it gives Bruce Berkowitz greater flexibility to run the fund the way he did in its early days. I think he’s learned a lesson from  St. Joe (JOE) about getting too involved in the day-to-day management of a holding. That said, it might be a while before the fund has a big cash stake again, so it still has higher risk baked into the equation for some time.

 William Blair Small Cap Growth (WBSNX) is an even bigger surprise, I suspect. Under Karl Brewer and Michael Balkin, this fund also had a great first half of the decade and a lousy second half. Over the past 12 years, it has returned 9.4% annualized versus 0.7% for the Russell 2000 Growth and 2.7% for the small-growth category. It also put up its best performance with a small asset base. However, assets remain modest because the fund closed in 2004 and again in 2006 before later reopening. That said, a glance at yearly returns tells you that this superaggressive fund thrives when earnings growth is prized in the market and sinks when it isn’t.

 CGM Focus (CGMFX) is still up 10.7% compared with 3.8% for the S&P 500 over the past 14 years despite a horrific past three. Thus is the promise and danger of this fund neatly summarized. Ken Heebner, who recently turned 71, is another superaggressive investor, one who zips among sectors and long and short positions.

 Vanguard Capital Opportunity (VHCOX) has gained 11.2% over the past 14 years compared with 5% for the Russell Mid Cap Growth Index and 3% for the average large-growth fund. The Primecap team running this fund does excellent in-depth growth research. Put it with Vanguard’s low fees and you have a winner. This gem is closed, but  Primecap Odyssey Aggressive Growth (POAGX) resembles this fund in its youth, given its mix of small- and mid-cap stocks and a modest asset base.

The Top Five Versus Peer Groups
Matthews Asia Dividend Investor, Vanguard Capital Opportunity, and CGM Focus hold down the top three slots. However, two new funds took fourth and fifth place.

 Janus Triton (JATTX) just barely cleared the five-year hurdle, but that’s about the only knock against it. It isn’t as proven as, say, Vanguard Capital Opportunity, but Chad Meade and Brian Schaub have rocked this small-growth fund since it launched in 2006. The pair looks for small companies with strong sustainable advantages. They moderate risk by insisting on decent valuations when they buy. So far, they’ve beaten most of their peers with a 10.4% annualized return versus the small-growth group’s 4.9% average..

The closed  Artisan International Value (ARTKXhas returned an impressive 14% annualized under David Samra and Dan O’Keefe compared with their typical rival’s 7.8% gain. What’s impressive about their nine-year record is the consistency of outperformance.  Artisan Global Value (ARTGX) is still open to new investors.


author: Russel Kinnel