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DOW JONES     Hey chuck (Luck i m your father)

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Luck i m your father     posted : 09/03/10   07:36 am

BOSTON (MarketWatch) -- You may not be celebrating the one-year anniversary of the stock market bottom this Tuesday, but mutual fund executives are, because their worst 12-month period in recent history is closer to becoming a bad memory.

Fund companies sometimes encourage investor amnesia, and there's little doubt the industry hopes you will linger on the feel-good feelings of the past year rather than the painful past.

It's what the fund industry always does as the wounds of its traumas heal. Every time a significant anniversary passes, negative data falls out of one marketing period. As a result, according to Lipper Inc., the average large-cap growth fund can now crow about a return that topped 60% over the past 12 months.
Special Report: RIDING THE RALLY

Making money, year two
The rebound in stocks that started in March 2009 turns a year old, putting the spotlight on the second year of a bull market. Hint: Stick to what's worked.
• Jaffe: Don't be fooled by funds' one-year results

Best and worst since bottom
The best-performing stocks in the past year share one trait in common. Concerns over their imminent doom abated. The losers are more varied.
• Real estate ETFs still on shaky ground

Bank stocks climb from abyss
Vanishing fears about nationalization and liquidation helped bank stocks more than double in past year. But the sector's still on fragile ground.
/conga/story/2010/03/bull.html 62896

Somewhere below that headline number, that average fund will disclose that its two-year results are an annualized loss of more than 6%. The fund can again boast about being profitable over a five-year time horizon; the gain is less than 1.5% annualized, but since those returns were negative as recently as last month, it's progress.
Tricks of the trade

Tricks with numbers are a fund industry standard. Coincidentally, a day after the market bottom falls out of the one-year return number, the top of the Internet bubble from 2000 drops out of the most recent 10-year return period, which means decade-long returns will now start with the beginning of the 2000-2002 bear market.

This will make the 10-year return numbers particularly ugly, but don't expect that to come up in the fund conversation. As time passes and that bear market falls out of 10-year returns, expect funds to start touting their long-term benefits again.

For now, however, the story funds are selling is a short-term one.

"Investors always have a mentality of 'What have you done for me lately?' and funds have always used that to their advantage when they can," said David Hyland, a finance professor at Xavier University in Cincinnati. "Funds will always put their best foot forward, whatever time period works best to showcase the numbers. ... You'd like to think investors recognize this by now, but performance advertising still seems to work."

Fund experts, on the other hand, aren't so willing to forgive and forget.

"If a fund didn't protect you from some of the downturn and hasn't gotten you with the rebound at least close to where it was at the start of 2008, you shouldn't be satisfied," said Steve Goldberg of Tweddell Goldberg Investment Management.

By that definition, the average large-cap fund has little to cheer about, despite that 60% gain in the last year. Many top-performing funds of the last 12 months are struggling to erase the misery they caused, and their winning short-term performance can lead investors to hang on, hoping for a return to break-even or to the peak of their account.
Focus long-term

Moreover, plenty of investment managers say that 2008's downturn was so bad and out of character for the market that funds should somehow be given a pass; do that, and you start judging funds on their bull-market returns only.
Berkshire Hathaway and the magic of compounding

MarketWatch's Sam Mamudi examines the long-term returns that Berkshire Hathway has secured for investors under Warren Buffett. He compares the results to mutual funds for The News Hub's Kelsey Hubbard.

That would make a fund like Brandywine Blue /quotes/comstock/10r!bluex (BLUEX 22.39, -0.04, -0.18%) look fine, because shareholders will see a 31% pick-up in their accounts over the past 52 weeks. An investor who takes solace in that rebound is ignoring that Brandywine Blue ranks dead last in its peer group over that period, and has been a dullard for the past five years.

"You do have to recognize that the last two years have been extreme, and that even the best funds haven't been able to avoid all of that," said Gregg Brewer, executive director of research at Value Line, "but you would be foolish to judge a fund only on what it has done lately.

"Looking out at longer time frames will give you a truer picture," he added. "Fund companies will tell you to worry about what the fund is doing now and what it is doing next, but I think most people aren't expecting the market to keep going like it did in 2009, so they shouldn't forget how a fund did in 2008."

Funds have to include longer time horizons in any advertising they do, but they can still headline the big, recent results.

A year ago, fund companies were hoping investors would not judge them on their miserable 12-month results as the market was bottoming out. Now they hope the exact opposite. Fund buyers need to be smarter than that.

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.

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