Tracking Mutual Fund Performance Across Business Cycles


Fund managers often specialize in a few investment strategies, giving them the chance to shine when conditions are favorable (think US equities last year) or underperform relative to other funds when the market turns against them (many bond funds over the same period). To even things out and get a better long-term perspective, they insist that investors should judge the performance of a fund over a full market cycle instead of just looking at recent events.

Putting full-cycle performance to the test

The argument is reasonable, but it could also be an easy way for underperforming funds to wave away criticism, so Charles Boccadoro, associate editor at the Mutual Fund Observer, decided to put mutual funds’ persistence to the test by checking returns for well-known mutual funds over the last six market cycles, covering the period 1973 – 2013, and he found that even top performing funds were unable to perform in the top quintile of risk-adjusted return across each market cycle.

“MFO Great Owls Mairs & Powers Balanced (MAPOX) and Vanguard Wellington (VWELX) have enjoyed superior returns the last three cycles, but not so much in the first. The reverse is true for legendary Fidelity Magellan (FMAGX),” writes Boccadoro. “Even a fund that comes about as close to perfection as possible, Sequoia (SEQUX), swooned in the late ‘90s relative to other growth funds.”

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Full-cycle mutual fund performance as one measure among many

That’s not to say that full-cycle performance doesn’t matter. There are still some funds that stand above the rest (like Sequoia mentioned above), but none of them are immune to getting caught by the market and losing money.

“While each cycle may rhyme, they are different, and even the best managed funds will inevitably spend some time in the barrel, if not fall from favor forever,” writes Boccadoro.

And while every fund sometimes has weak returns over a cycle, the opposite isn’t true – there are plenty of funds that never perform well against their peers, and looking at full-cycle returns can show who these consistent underachievers are (and prevent you from falling into claims that they will rebound when the market takes its next turn).

As always, looking at yesterday’s returns is no substitute for due diligence today, but full-market performance data is useful enough that Boccadoro will incorporate it into the Mutual Fund Observer’s risk profile search tool in the future so that investors can add it to their toolbox when researching funds.