Bye-Bye, Black Monday

Most mutual fund managers have looked pretty good over the last 10 years.

They are about to look better.

At the end of this month, the performance results of mutual funds with a 10-year track record will no longer include October 1987, the month of the Black Monday stock market crash.

As a result, the annualized average performance of a stock fund over “the last 10 years” will increase by more than 4%.

Since performance is the number that most sells a mutual fund, you can bet that many funds intend to crow about their heightened success. But with the 10-year track records now virtually devoid of bad news, the impressive numbers hide more about funds than they reveal.

As a result, investors may need to rethink how they use long-term data in their decisions.

“Relying on any single number is dangerous, and this shows why,” says Michael Lipper of Lipper Analytical Services, which tracks fund performance. “If you simply look at numbers without context, you are headed for trouble. That’s particularly true with what is about to happen to 10-year performance records.”

What is about to happen is astounding.

The average stock mutual fund lost 21.95% during October 1987, according to Lipper Analytical.

If you had terrible timing and invested in the average fund on Oct. 1, 1987, your investment has tripled since, up 11.9% a year (assuming all dividends and capital gains were reinvested).

Not bad, until you see that between Nov. 1, 1987, and Sept. 30 of this year--10 years minus one month--the average fund quadrupled--i.e., rising nearly 15% annually.

So long as there is no market trauma this month, 10-year track records will inflate like a balloon.

Take, for example, the CGM Mutual fund, a top performer over the last 15 years but a dog in October 1987, when it fell 34%. Its 10-year annualized performance currently stands at 18.26%; take away October 1987 and it jumps to 23.57%.

“Obviously, this kind of change makes it really important that investors understand what’s behind the numbers they are looking at,” says David Masters of Micropal Inc., an industry data service whose numbers fund companies use, for advertising purposes, to determine when their records will look best. “Track records tell you how a fund did but don’t tell you how a fund did it. You need to see if a fund can be consistent, and that means looking at shorter-term numbers and making some comparisons.”

With the last vestiges of the crash fading from 10-year records, and with young funds having no bear market experience at all, you shouldn’t overvalue history in your decision-making process.

“Clearly, you would be hard-pressed to say that you honestly expect the next 10 years to be the same as the last 10,” says Don Phillips, president at Morningstar Inc., which uses 10-year track records as a significant component of its star-rankings. “And your returns are determined more by what lies ahead than by what a fund has done in the past.”

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Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at [email protected] or at the Boston Globe, Box 2378, Boston, MA 02107-2378.

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Out From Under the Cloud

Here’s a estimate of the statistical windfall that the nation’s largest mutual funds stand to reap next month, when the market crash of October 1987 disappears from 10-year track records. Each figure is average annualized return. Funds are ranked by asset size.

Fidelity Magellan

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 15.42%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 19.28%

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Vanguard Index 500

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 14.33%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 17.52%

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Investment Co. of America

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 13.54%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 16.03%

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Washington Mutual

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 14.45%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 17.02%

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Fidelity Growth & Income

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 16.38%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 19.47%

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Fidelity Contrafund

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 18.89%

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 23.39%

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Fidelity Puritan

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 12.84%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 14.88%

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American Century Ultra

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 18.31%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 23.53%

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Vanguard Windsor II

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 14.76%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 17.38%

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Vanguard Windsor

Return from Oct. 1, 1987, to Sept. 30, 1997----includes crash: 14.06%

Return from Oct. 30, 1987, to Sept. 30, 19997----postdates crash: 16.43%