How to Read a Mutual Fund Performance Chart
The Internet makes available an amazing amount of mutual funds information and analysis. Even better, the investor can get this information almost immediately in graphic form -- a luxury unknown to previous generations of investors. Properly used, a mutual fund performance chart quickly makes clear the essential meaning of thousands of data points.
A Typical Chart
Let's look at the five-year performance chart for a typical small-cap value fund, the Walthausen Small Cap Value Fund (symbol: WSCVX). Small caps are companies with capitalizations of $2 billion or less. A value fund invests in companies the fund management believes are underregarded by the investment community and, consequently, are underpriced. Going to the mutual fund research section at a large online brokerage and entering WSCVX brings up a chart showing the five-year results not only for the Walthausen fund, but for two benchmark indexes. The first is the Russell 2000 TR USD, an index of 2,000 small-cap growth stocks. Growth funds hold equities with recent positive momentum in price, earnings, sales and cash flow. The other is the Morningstar Small Value Category, which tracks all listed small value funds within the category. Morningstar is a well-known stock charting and evaluation service.
Meaning at a Glance
It's immediately clear that despite the differences in investment strategy between value funds and growth funds, the two indexes -- one small-cap growth, the other small-cap value -- track closely; the two chart lines nearly touch throughout the five-year period. It's also evident that the Walthausen fund has substantially outperformed both indexes: As the three chart lines move from the left (five years ago) to the right (June 2013), the Walthausen chart line diverges consistently above and away from the indexes. The notation under the chart quantifies this. A $10,000 investment in the three equities has these values after five years: Russell 2000: $15,224.65; Morningstar Value: $15,422.72; Walthausen: $23,400.39.
The Walthausen Small Cap Value Fund has outperformed the two indexes by about 54 percent over the five-year period -- an impressive result. What the chart also shows is that the Walthausen fund's performance has been consistent; no one-time big gains would explain the difference, and no one-time losses might indicate that the fund's superior performance came at the cost of greater volatility.
The chart page also presents other useful information. The YTD (year-to-date) return as of June 30, 2013, is 13.26 percent, which projects a current year return of about 26 percent. The gross fund expenses are 1.31 percent, while the average expenses for the category are 1.43 percent. The difference isn't significant, but it's a plus that expenses aren't high; funds with higher than average expenses find it difficult to maintain good returns over the long run. The chart also shows a turnover of 53 percent. It means that on average the fund turns over its holdings every 23 months. This is another plus that foretells good future results. On average, funds turn over their holdings once each year. Trading costs contribute substantially to overall costs. What this means for the Walthausen fund is that it has an expense advantage of about 0.5 percent annually over the average mutual fund.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.