The risk-adjusted mutual fund performance ranking published here is calculated for the average risk-averse investor who, according to the Pension Research Institute's analysis, would require 400 basis points to switch from low-risk fixed-income instruments to stocks.
The risk for this investor is that they earn a rate of return lower than 8.7%, which was the historic return on a 50/50 mix of stocks and bonds. Any returns above 8.7% are not risky. In fact, the higher the better.
Based on this investor's degree of risk aversion, a certain amount of the downside risk is subtracted from the raw return to calculate the risk-adjusted return. The T. Rowe Price Science & Technology fund had about the same amount of downside risk as its New Era fund. Therefore, the investor described here would subtract 70 basis points from the nominal return to generate the risk-adjusted return.
The fund with the greatest downside risk was Harbor fund, which had 220 basis points subtracted from its raw return of 17.5% for a risk-adjusted return of 15.3%. The risk numbers indicate the past five years was a relatively low-risk time to be in the stock market. That does not mean the next five years will be one of low risk. The important thing is how each fund performed on a risk-adjusted basis relative to an appropriate index.
T. Rowe Price Associates Inc., Keystone Custodian Funds Inc., Twentieth Century Investors Inc., Putnam Investment Management Inc., Vanguard Group Inc., Merrill Lynch Asset Management and Fidelity Management & Research Co. had funds that beat all of the Frank Russell indexes for the past five years; that should provide useful information.
To estimate how your fund performed relative to the FRC indexes, find the five-year raw return and risk numbers on the chart on page 24 and locate them on the chart above.
Frank A. Sortino is director of the Pension Research Institute, (415) 323-6111. Previous articles on downside risk were printed in Pensions & Investments March 6, May 1 and Aug. 7.
