Keeping on the same theme of performance, I recently had a client ask me a question about why the performance of the Templeton Growth Fund in the newspaper was so dramatically different from the performance of his investment statement.
In the monthly review of mutual funds found in any of the major newspapers, you will note that the 1 year return for the Templeton Growth Fund is 2.2%, 2 years is 13.8% and 3 years is 6.6% Compound Annual Return (CARR) to the end of August 31, 2000.
The case of Roy
My client, Roy, noted that his return on his personal investment statement was 36.32%. Why was there such a discrepancy when you compare that to what is in the newspapers? It's a good question and further emphasizes why the returns in the newspaper can be so misleading. Let me try to describe the reasons for the discrepancy.
Firstly, Roy's rate of return does not match the newspaper because he did not buy Templeton in one lump sum on Aug 31, 1999, Aug 31, 1998 or Aug 31, 1997. The returns in the paper are a ‘snapshot' in time which means that those returns only apply to you, specifically, if you bought on any of those days. This would be pretty rare. In the above chart, you can see that the start point and end point are the only two points that matter to the three-year return. Everything in between is irrelevant.
A different start date (or end date) will change the rate of return. For Roy, he purchased units on February 17th (red dot) which happened to fall on a low point of the Templeton chart (this was simply a case of good timing, not skill or foresight).
A different end date can make a difference too. In Roy's case, we did not simply buy and hold. In fact, there was a need to sell some units between the time he bought and August 31, 2000. In fact, Roy sold units on April 26, 1999 and September 19, 1999 (marked by the X). The rest of the units continued to be held on Aug 31, 2000. In Roy's example, he has three different end dates for his CARR calculation. Buying low and selling high made a big difference in the actual return for Roy.
The morale of the story
Once again, it is important that you do not hold too much credibility in what the newspapers tell you. It is not that the information is false but because of timing, the newspapers print data based on unit values at the end of every month. Unless you just bought at the end of the corresponding month, you are likely to have a different return than what the paper tells you.
Again, the example used here is Roy's real situation – all numbers are real. The example is simply used to illustrate that performance can be misleading. I am not making any conclusions as to whether Templeton is good or bad. In this case, an investment may look bad on paper at any given time, but different circumstances can create different outcomes.
As I mentioned in previous articles, the opposite (negative surprises) tends to happen more often where an investment looks really good on paper but your actual return tends to fall short of the expectation. Often, when an investment looks really good in the paper, it means that a lot of the growth has already passed. Be careful not to buy high and sell low.