Selected Per-Share Data and Ratios

Table 14–5 summarizes a typical fund’s performance over the periods shown, and this information can be found in the fund’s prospectus or annual report. Although the selected per-share data vary in detail from fund to fund, the format is essentially the same.

The “Investment Activities” section of Table 14–5 shows the amount of investment income earned on the securities held by the fund; this income is passed on to the fund’s shareholders. For instance, in 2006, all of the net investment income of $0.37 was distributed to the shareholders (line 4), but in 2005, only $0.30 of the $0.31 of net income was paid out to shareholders. In 2005, the $0.01 that was not distributed to shareholders increased the NAV (line 7) in the “Capital Changes” section. (The capital loss and distribution of gains were reduced by this $0.01 because it was not distributed.) Capital gains and losses also affect the NAV. Funds distribute their realized capital gains (line 6), but the unrealized capital gains or losses also increase or decrease the NAV.

Changes in the NAV from year to year give some idea of the volatility in share price. For instance, for the year 2005, the NAV decreased by $1.01, which is a 9.17 percent decrease. If you invest $10,000 knowing that it could decline to $9,082.65 (a 9.17 percent decline), how comfortable would you feel with this investment in the short term?

The portfolio turnover rate gives prospective investors an idea of how actively the investment assets in a fund are traded. A turnover rate of 100 percent indicates that the investment assets are sold an average of once during the year. For example, if a fund holds stocks with a value of $100 million, that means $100 million of stocks are traded once a year with a 100 percent turnover rate. According to Morningstar Mutual Funds, as reported by the Vanguard Group (1999), the average stock mutual fund turnover was 86 percent. High portfolio turnover (more than 200 percent) might not necessarily be bad for shareholders in that the fund might be generating high capital gains.

Table 14-5
Selected Per-Share Data and Ratios


High turnover is an indication, however, for shareholders to expect capital gains distributions by the end of the year. In accounting terms, the amount of the distribution per share is deducted from the NAV of the shares in the fund.

Index funds have extremely low turnover, around 5 percent (The Vanguard Group, 1999). The advantages of lower turnover are decreased costs and greater tax efficiency. A fund also might have low turnover because it has been holding low-performing stocks for a long time in the hopes of a turnaround. This situation has occurred with many value funds where value stocks did not participate in the stock market rally of the three years from 1996 to 1999. The ratio of operating expenses to average net assets is fairly low in the example in Table 14–5 (close to one-half of 1 percent). You can determine an average total return by considering the three types of returns on a mutual fund—dividends distributed, capital gains distributed, and changes in share price—by using the following formula:

This simple 13.5 percent yield indicates that an investor in this fund received double-digit returns mainly because of gains realized and increases in the NAV share price. The more volatile the NAV of the fund is, the greater the likelihood there is of unstable returns.

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