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Mutual Funds and Track Records

When shopping for new clothes or household goods, how do you decide what to buy? Price is typically an important factor, but so is quality. If you’re familiar with a brand and satisfied with how its products have performed in the past, you’d probably consider buying that brand again in the future.

But when it comes to shopping for mutual funds, past performance is a less helpful indicator of future performance. That’s because it’s difficult to determine whether fund performance is due to the manager’s skill or to sheer luck. Typically, what separates good performance from bad during distinct market periods is how funds differ in their investment style and approach to risk. For example, growth-oriented funds tend to do well when the economy is expanding and suffer during low-growth periods or recessions.

These factors help explain why so few fund managers are able to consistently outperform their peers, says Jim Peterson, Chief Investment Officer at Charles Schwab Investment Advisory, Inc. “Even those managers who are highly skilled may face other obstacles, such as high expense ratios that are difficult to overcome or a success–fueled influx of new assets that spreads returns too thin,” he says.

Jim advises taking a more nuanced view when evaluating mutual funds.

  • Consider different return periods. One-year returns can capture momentum in certain sectors, while longer periods are more likely to show a manager’s skill at selecting securities. Looking across multiple time periods can serve as a good gauge of consistency.
  • Look at a fund’s portfolio holdings. This can tell you whether the manager is “hugging” or simply copying the fund’s benchmark to keep performance from deteriorating.
  • Compare costs. It’s always important to understand how a fund’s expense ratio stacks up against similar funds.

Jim’s team at Charles Schwab Investment Advisory considers all of these factors and more when determining which funds will make the Schwab Mutual Fund OneSource Select List®. The team also employs statistical techniques to help differentiate manager skill from luck. “It feels natural to evaluate mutual funds by past performance,” Jim says, “but we have found that identifying truly skilled managers takes more digging.”

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Important disclosures:

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

Past performance is no guarantee of future results.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab’s Mutual Fund OneSource service (and certain other funds with no transaction fee) and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Funds, which may charge a separate redemption fee, and funds that accommodate short-term trading. For trade orders placed through a broker, a $25 service charge applies. Funds are also subject to management fees and expenses.

Trades in no-load mutual funds available through the Mutual Fund OneSource service (including Schwab Funds), as well as certain other funds, are available without transaction fees when placed through or our automated phone channels. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds. Funds are also subject to management fees and expenses.

Charles Schwab Investment Advisory, Inc., is an affiliate of Charles Schwab & Co., Inc.

©2016 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.


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