"Alternative Facts" in Mutual Fund Annual Reports

It’s that time of year again when all the mutual fund companies trot out their annual reports with smiling faces to promote their wares.  2018 was a tough year for most fund companies; especially those with active mandates.  According to S&P Versus Active (”SPIVA”) reporting at December 31, 2018 for active large cap mandates, over 5-, 3-, and 1-year horizons 82%, 79% and 64% of active managers underperformed the S&P 500, respectively.  It is interesting to see how this fact is communicated to shareholders.

One fund company that I follow seems to report everything with a smiling face when the underlying facts and figures are to the contrary.  For example, this is from the Executive Chairman’s letter to shareholders, “…believes active risk management offers downside mitigation and may improve investment outcomes” and “long term perspective” is “ensuring our investment decisions align with the investing time horizons of our clients.”  This statement seems to indicate that short term blips in performance are less important than the longer term perspective; so don’t worry about 2018!

When I check the numbers against the text, it doesn’t match up.  As we all know, the S&P 500 was down -4.38% in 2018; the fund I am looking at was down -5.31% so it underperformed.  We would expect the Executive Chairman to say something to mitigate this -0.93% underperformance in 2018.  However, when I look at longer term returns I don’t see much difference.  Over 5- or 10-year horizons shown in the annual report we see continued underperformance to the S&P 500 of -1.28% and -1.10%, respectively.  These figures are just for “A” class shares (60% of the fund), underperformance is worse for the higher cost shares and better for the lower cost institutional shares.

So, it is hard to see how the Executive Chairman can say something like he did, when the numbers don’t match the words.  The “long term perspective” did not help shareholders!  Of note, the $5.1 billion mutual fund saw net outflows in 2018 of -$550 million (about 10% of the fund) so someone is noticing.  All I can say is “Buyer Beware”!