April 4, 1997
By KAREN
DAMATO
Staff
Reporter of THE WALL STREET JOURNAL
The average
stock fund has trailed the Standard &
Poor's
500-stock index benchmark in recent years,
prompting
plenty of grousing. But did funds
actually do
even worse than the usual measures of
"average" performance?
Some
fund researchers
and finance professors
believe the
answer is yes. To bolster their case,
they've been
prowling around the mutual-fund
graveyard,
gathering the names and vital
statistics
of the many mutual funds that have
been merged
into others or liquidated out of
existence.
Lousy
performance is a prime reason that funds
are killed
off, they explain. So the usual
industry
averages, figured without deceased
funds, may
be somewhat exaggerated and "not
representative of what investors actually got,"
says Don
Phillips, president of Morningstar Inc.,
the Chicago
fund-data company.
However, the
graveyard hasn't yielded all its
secrets --
or conclusive findings. Some industry
data and
academic research show that "average"
fund results
for particular periods have been
boosted
significantly by the absence of dead
funds. But
other numbers suggest that there was
no
significant upward distortion of "average"
fund results
over the past decade.
If such
distortion exists, it would be yet
another
reason for investors to favor unmanaged
index funds
that simply track the S&P 500 or
another
benchmark, say index-fund advocates such
as Vanguard
Group Chairman John C. Bogle.
While the
results aren't necessarily clear, it is
obvious that
lots of funds disappear each year.
In 1996, for
example, 242, or 5%, of the 4,555
stock funds
tracked by Lipper Analytical Services
Inc., of
Summit, N.J., were merged or liquidated.
As a result
of such yearly disappearances, some
of Lipper's
fund-performance averages, like wine
and cheese,
have improved markedly with age.
Consider
1986: A decade ago, Lipper reported that
568
diversified U.S. stock funds had delivered an
average 1986
return of 13.39%. Today, Lipper,
which
supplied the data for this section, puts
the average
1986 return at 14.65%. Why the
improvement?
The new number is based on the
performance
of only the 434 funds from the 1986
group that
are still in business today.
If you look
at results for dead funds as well as
survivors,
says Princeton University economics
professor
Burton Malkiel, "you show that
mutual-fund
returns are a lot lower than most of
the
published statistics."
Mr. Malkiel
did just such a study, using Lipper
data, for
the decade from 1982 through 1991. His
conclusion,
published in the Journal of Finance:
While funds
around for the whole period gained an
average
17.09% a year, the average return from
all funds in
existence each year was a lower
15.69%. The adjustment
makes the average fund
look even
worse compared with the S&P 500's
average
annual gain of 17.52%.
"The
main lesson is that active management has
not done
super-well," says Mr. Malkiel, the
author of
"A Random Walk Down Wall Street."
(That's not
a surprising conclusion from Mr.
Malkiel, a
self-described "believer in index
funds"
and also a board member at Vanguard, a big
index-fund
seller.)
But the
argument that average fund returns are
inflated by
survivorship bias isn't airtight,
particularly
for more recent periods. Using an
admittedly
crude calculation based on Lipper
numbers, Mr.
Bogle of Vanguard estimates that
survivorship
bias added only three-tenths of a
percentage
point to the average annual stock fund
return over
the past decade. That's not much when
the average
annual return was over 13%. However,
in looking
at the 15 years through 1992, Mr.
Bogle found
an upward bias of just under one
percentage
point a year.
Underscoring
the issue's ambiguity, officials at
Morningstar
got a surprise this week when they
looked at
preliminary results of a campaign to
eliminate
survivorship bias from their database.
Over the
past decade, it appears that adding dead
funds back
in with survivors wouldn't change the
average U.S
stock fund performance at all.
That jibes
with data from Micropal Inc., a
fund-research firm based in Britain that keeps
some
performance records on U.S. funds both with
and without
an adjustment for survivorship bias.
Performance
differences are slight over the past
decade, says
David Masters, a senior funds
analyst, and
some stock-fund categories actually
performed
better when nonsurviving funds are
included.
In any
event, the survivorship-bias debate
highlights
the approximate nature of some numbers
that
investors may assume to be precise. Fund ads
always warn
that past performance is no guarantee
of future
results. When it comes to the "average"
stock fund
or "average" small-stock fund, it
seems, past
performance doesn't even guarantee an
exact
indication of what happened in the past.
Distortions
in fund-performance averages could
become more
pronounced in future years. The stock
market could
see some tough times, Mr. Bogle of
Vanguard
says, and an extended downturn might
lead to lots
more funds being merged or
liquidated.
He figures that survivorship bias was
far greater
in the decade through 1981, a period
that
included the painful 1973-1974 bear market.
Meanwhile,
data gatherers at Lipper and
Morningstar
fret about a different threat to the
accuracy of
their fund-performance averages --
what
Morningstar's Mr. Phillips calls "creation
bias."
Regulators are allowing some new funds to
count, as
part of their track record, performance
achieved
when the funds existed as limited
partnerships
or other nonfund vehicles. Fund
companies
will only want to cite such records if
they are
good, the data gatherers say. So
including
that "preinception" performance in fund
averages
will tend to pump up results.
Mr. Phillips
says Morningstar will probably add
such
performance to its database but highlight it
in some way
as hypothetical. Lipper won't put
those early
results in its standard database. "To
me, this is
a much bigger issue than any sort of
survivor
bias," President A. Michael Lipper says.
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