Is There a Better Way to Measure Fund Performance?

Morningstar's John Rekenthaler makes a compelling case for switching the industry standard to measuring projected income rather than total return

John Rekenthaler 5 November, 2014 | 2:48PM
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BlackRock dropped by our Chicago headquarters earlier this week to discuss its new solutions-based funds. "Solutions-based funds," meaning funds such as target-date or managed-payout that describe themselves in terms of goals rather than what asset classes they hold, are the new black of investment marketing. In using that language, BlackRock is far from alone.

Its effort, though, is unusually ambitious. BlackRock aims not merely to offer funds that carry a different label but also to overturn the foundation of performance measurement: scoring funds by their total returns. The company argues that for investors approaching (or in) retirement, the better way to think about progress is the growth (or shrinkage) of projected income.

This might strike you as a tautology. After all, if projected income is calculated by multiplying an investor's current assets by a fixed withdrawal rate (say, 4%), then any change in portfolio value will lead to a corresponding change in projected income. That is, if the portfolio gains 5%, then the income that can be generated from that pool will also grow by 5%. So, how is projected income anything more than total return restated?

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.