Mutual Fund Managers Are Happy to Leave 2002 Behind!

Assuming that 2007 turns out to be a good year for the stock market, mutual fund managers will be happy to forget about 2002. What am I talking about? Well, according to this Wall Street Journal article ($), the most often-used gauge of mutual fund performance is the 5-year average. As of right now, the most recent 5-year period includes 2002, which was a bad year for the market. The S&P 500 Index lost over 22% that year. At the end of 2007, mutual fund managers will report their 5-year averages using the 2003 – 2007. It will make a huge difference in their performance numbers. As the graphic below shows, the average annual return of the S&P 500 Index was 6.19% over the last five years.

Now, if we wipe out 2002, the average annual return rises to 14.46%. That’s a HUGE difference!

Granted, the 2007 has just started and there’s no telling where the market will end up at the end of the year. If the market ends up down for the year, the mutual fund companies will have to start all over again!

One important thing that investors should take from this is to ALWAYS look at the long-term. Although five years is a lifetime to a mutual fund manager, five years IS NOT long-term in the eyes of an investor.

6 thoughts on “Mutual Fund Managers Are Happy to Leave 2002 Behind!”

  1. Bill,

    Yes, I read the WSJ article and normally I do post a source when I reference it. However, I didn’t quote the article nor did I use their numbers.

  2. Thank you for bringing this up. I always go by the 10 year returns (or more if available), but I wouldn’t have thought about how dropping 2002 would affect the numbers.

    However, historical returns are only part of the picture (as you’re aware), and any investor must do due diligence when picking their investments anyway.

  3. While dropping 2002 out of the 5 year range is great and all, I am more interested in when 2003 gets dropped also. A major reason for the 14.46% return (which 2002 dropped) is because of the massive gain made in 2003, which of course was partly due to the big drop in 2002. If you drop out 2002 AND 2003, the average return becomes ironically ~10-11% which is what everyone says the market has returned since 192X or so.

  4. crsandus,

    EXCELLENT point!

    I don’t see the value of 5-year numbers. They are too short-term in my opinion.

  5. Anything that does not include bear market performance can be very misleading, if you are using historical numbers for past performance. We all know that value managers would have looked poorly at the end of the nineties, but beat the pants off of growth managers in the three years to start the decade. I would use nothing short of 10 year numbers.

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