Be aware that the mutual fund historical data graphs at both Google Finance and Yahoo! Finance (and perhaps other sites) do not correctly calculate the total return of a fund.  This can be very misleading when comparing a fund’s performance to an index or to another fund.

For example, you might want to know whether a particular mutual fund performed better than the overall market.  Let’s use Fidelity Magellan (FMAGX) as an example.

If you compare FMAGX to the S&P 500 Index for 2007 at Google, you get a graph like this:

The blue line is the value of the mutual fund and the red line is the value of the index.  Looks like they came out about even, right?  So the mutual fund did no better than the index.  Not so, mon frere.  Take a closer look.  In the next graph, you’ll see there are four large downward steps in the mutual fund, labeled A-D:

Note that at points A and C, both the mutual fund and the index decline.  So it’s likely that the fund went down in value just as a response to the overall market.  However, at points B and D the fund value plummeted while the market muddled on.  What happened?  Bad day for the fund?  No.  The funds were fine.

These graphs do not account for the change in the fund share price when the fund distributes capital gains.

When a fund distributes capital gains or dividends, it lowers the share price by the same amount.  For example, if a fund share price is $50 and it distributes $5 in capital gains, the new share price is $45.  If you take the distribution in cash, you have $5 in cash and $45 in stock = $50 (same as before).  If you reinvest the distribution, you buy new $45 shares with your $5, and you now have 1.111 shares at $45 = $50 (same as before).

It turns out that at points B and D, Fidelity Magellan had large distributions of capital gains.

Here’s the same data graphed at Yahoo! Finance:

Sorry that the font is impossibly small to read.  Click on the image to make it full size.   The blue line is the value of the fund, and the red line is the S&P 500 index.  Again, points B and D indicate when the fund had capital gains distributions.

Yahoo, like Google, gets it wrong.  What’s even more pathetic is that in the tables of historical values, Yahoo calculates the fund value correctly, in the last column, “Adj. Close.”  Why they chose to plot the uncorrected value is beyond comprehension.

So what’s a girl to do?

Use a better service, like Morningstar or Schwab.  There are probably others, but these are the two that I checked.  Here’s the graph from Schwab:

It’s hard to read and customize, but the take-away from the graph is that at the beginning of the period, the fund lagged the index, but at the end it was ahead.  So for 2007, the fund beat the index.

The picture is even clearer at Morningstar:

At Morningstar, the dividends and capital gains are correctly included, and it is plain to see that money invested in FMAGX trounced the S&P 500 for the year 2007.  Note that this is a completely different conclusion than one would have arrived at by looking at the Google or Yahoo graphs.

The Google and Yahoo graphs are completely worthless.  No.  Worse.  They are misleading.

Google and Yahoo should either fix the graphs or remove them.

Note that the above only applies to mutual funds.  Historical stock prices at all of the above mentioned sites correctly account for share splits, giving a true picture of their change in value over time.

Full disclosure:  I do not own any shares of Fidelity Magellan.  This post is not intended to recommend for or against this fund.  I chose it as an example because it had relatively large capital gains distributions during a (relatively) calm market.

This post was included in the Carnival of Personal Finance hosted at AlmostFrugal and the Money Hacks Carnival at Studenomics.

Tags: FMAGX, Google Finance, mutual fund return, Yahoo! Finance

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