(PUB) Morningstar FundInvestor

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On a Roll Morningstar Research | Michael Herbst

top quartile 45% of the time and in the second quar- tile 48% of the time. Skippers Clyde McGregor and Rob Taylor favor stocks trading at deep discounts to their estimates of intrinsic value. They’re no dumpster-divers, however, and they generally opt for companies with promising growth prospects. That double-barreled approach helps avoid value traps and builds a margin of safety into the portfolio. The duo’s solid execution has kept the fund’s rolling returns mostly out of the category’s bottom two quar- tiles. However, periodic bumps are part of the package, given a fairly concentrated portfolio and top position sizes of 3 . 5% – 5 . 0% of assets. In 2011 , several of the fund’s then-top holdings such as Oracle ORCL , Julius Baer BAER , and Daiwa Securities DSEEY sold off, fueling the fund’s 11 . 6% loss that year and causing its three-year rolling returns to fall in the category’s bottom quartile for several periods end- ing in mid- to late 2012 . Rolling returns don’t cap- ture the fund’s above-average Morningstar Risk over the trailing three-year and five-year periods or the fact that investors have been compensated for that risk—those traits are reflected in the fund’s 4 -star Morningstar Rating. Rolling Steady The rolling three-year returns for MFS Global Equity MWEFX land in the category’s middle two quartiles 60% of the time, yet it’d be a mistake to dismiss the fund as average. The fund has appealing defensive characteristics. Managers David Mannheim and Roger Morley stock up on higher-quality blue chips domi- ciled in developed markets. As of March 31 , 2013 , only 8% of assets were parked in no-moat stocks (those without any sustainable competitive advantage) versus the MSCI World Index’s 13% . That stability- oriented approach means the fund’s short-term performance will likely lag when racier fare is rallying, as in 2003 , 2005 , and 2009 – 10 , but it held up nicely in 2008 and late 2011 . The duo’s style has translated into less volatility over the long haul. The fund’s Morningstar Risk-Adjusted Returns over the trailing decade through May 15 , 2013 , land just inside the group’s top quartile, and its

We use rolling returns to get a clearer understanding of a fund’s performance. To assess rolling returns, we start with the trailing decade or a manager’s tenure on the fund. Then we look at performance over rolling periods during that stretch. For instance, if we want to look at rolling three-year periods over the trailing decade through May 2013 , we start with performance over the three-year period from June 2003 through May 2006 , then July 2003 through June 2006 , and so on through May 2013 . Rolling returns can show how consistently a fund has performed relative to its benchmark or category rivals. They also help investors understand a fund’s risk/ reward profile. Has a fund’s performance zigzagged between its category’s top and bottom quartiles, and if so, why? If its rolling returns land near the cate- gory average, is that pattern due to its strategy or a sign of merely average execution? When used with risk-adjusted performance measures such as the Morningstar Rating for funds, rolling returns help in- form what investors could reasonably expect from a fund’s performance pattern going forward. It’s helpful to look at other rolling periods, too. A fund with 20% annual turnover indicates an average holding period of five years, so looking at five-year rolling periods might be more appropriate. Looking at 10 -year periods can give a better sense of what to expect from deeply contrarian managers. In this article, we walk through several world-stock fund examples. We’ve graphed the fund’s rolling returns and put them next to their long-term trailing returns so you can get the whole story. Let’s Get Rolling The rolling three-year returns for Oakmark Global OAKGX reflect the fund’s fairly consistent rela- tive performance over the trailing decade. Over that stretch, its rolling returns landed in the category’s