Behind the Scenes: Insights from Funds’ Rolling Returns

Investors are often eager to see how the funds or managers they use (or are considering) have performed compared to indexes or peer groups over the trailing 3- and 5-years. It is understandable why investors want to own funds or managers with a record of outperformance. It is important to keep in mind that past performance does not guarantee future results. It is also important to question whether recent returns reflect the bigger picture. 

We believe investors are often too quick to conclude that a manager is “good” or “bad” based on whether or not it has beaten its benchmark for the trailing 3- or 5-years. The Investment Manager Research (IMR) team here at LPL has many tools to evaluate performance that go far beyond a simple comparison of recent returns. In our overall tool kit, rolling return analysis is a hammer we wield often. 

How Are Rolling Returns Different from Trailing Returns? 

They are different in the same way that a movie is different from a still shot or short scene. Whether it’s long-lost friends reuniting on a beach, Lady Liberty buried in earth and stone, or the beginning of a beautiful friendship on a foggy runway, even the most iconic movie endings only tell a small part of the story. Without the prior scenes, we would lack important details about the essence of the characters and how and why the closing scene is poignant. 

The same can be said for manager performance. We believe it is overly simplistic to compare a manager’s return versus a benchmark for one static time period, such as the 3-years ending 3/31/25, which is a trailing return. Yet this is the type of information typically available to most investors online or in fund documents. For example, Fund A outperformed its benchmark by 2.71 percentage points for the trailing 3-years, earning positive “excess returns.” In contrast, rolling returns provide a more complete picture of a fund’s history and help measure its consistency. 

Rolling 3-Year Excess Returns 

Source: LPL Research,
The above chart is displaying two mock portfolios.

Johnny-Come-Lately? 

In the chart above, the rolling excess returns of Fund A are plotted in green. We drew a red circle around the 3/31/25 data point for Fund A to mark what is essentially its trailing-period excess return, which is 2.71, mirroring our prior discussion. So that’s one data point on the rolling period chart – the final scene of our movie so to speak. But here comes the fun part – examining the prior data points on the chart to see whether the fund outperformed for various 3-year periods in the past. Did it outperform for the 3-years that ended on March 2024? No! Did it outperform for the 3-years that ended on March 2023? No again! In fact, the fund spent the vast majority of the last 8 years underperforming on its 3-year returns. It only outperformed in 13% of its 3-year rolling periods over the last 8 years. Only in the most recent months did Fund A finally start to outperform after a long draught. We could call Fund A the Johnny-Come-Lately of mutual funds. Sure, it’s doing well now, but where was it when it needed it before? 

The Ugly Duckling? 

Also plotted in the chart is hypothetical Fund B. Fund B is the Ugly Duckling of mutual funds. At this point, it is likely difficult to find new investors wanting to purchase Fund B, and its current investors might be wondering if they should sell. Why? Because its trailing 3-year return is 1.23 percentage points under the benchmark. But wait – there’s more! This has not been the typical experience over the longer history of the fund. Up until March 2023, the fund had outperformed in every rolling 3-year period over the last 8 years. Even after its recent underperformance, Fund B has still outperformed the benchmark in 77% of its rolling 3-year periods. That type of consistency may be clueing us in to the manager’s skill, pending some further analysis. 

The Plot Twist 

It might surprise some readers that many analysts on our team would – all else equal – rather invest in Fund B, the Ugly Duckling. Although its trailing 3-year performance is below the benchmark, unlike Fund A, it spent the vast majority of the last 8 years outperforming. Eight years was arbitrarily selected for this demonstration, and if we were doing this analysis on actual funds, we would have likely chosen the starting date based on the start date of the funds’ investment teams and/or the inception of their current investment process. To be fair, there may be some analysts on our team who would – all else equal – rather invest in Fund A, perhaps because they believe that what has recently started working in the current market environment may be the start of a new long-term trend. 

In reality, IMR does not select managers based on any one criterion, but rather a vast mosaic of quantitative and qualitative criteria. So, we do not really encounter these kinds of “all else equal” dilemmas because typically nothing else is truly equal, and rolling period performance is just one of many criteria we use to evaluate managers. 

What’s the Point? 

Our point here is not to “sell you” on Fund A or Fund B. Our point is that investors often over-emphasize recent, trailing period performance in their evaluations of funds and managers. In our view, funds like our hypothetical Fund B should not be ignored or sold from portfolios simply because they have underperformed for the last three years. We would examine why the fund underperformed in the context of the various market environments. If its investment style has gone out of favor or it has made some isolated, unfortunate stock picks, its more common tendency to outperform may resume in the future. Instead of an Ugly Duckling, it may be a beautiful swan.  

While Fund A and Fund B were neatly drawn up to make our point, in our experience charting performance, we see patterns like this frequently. It is quite common for funds to suddenly start outperforming, and we can identify this is an historical anomaly when looking at rolling returns. We also observe funds underperforming for a period of time before performance improves.  

Closing Thoughts 

Rolling returns are one of the many ways that IMR evaluates fund performance that are often unavailable to many investors. It is eye-opening to think about how much information an investor misses when they only examine trailing period returns. Our rolling-period analysis observes the entirety of the chart, which includes 96 data points (different month-end periods), compared to just one period for the trailing return. Personally, I will take 96 pieces of information over one piece of information anytime I can get it.  

We also generate charts that plot rolling risk measures like beta and tracking error, which measure market risk and risk relative to the benchmark, respectively. We also examine rolling, risk-adjusted measures of performance like alpha (excess returns adjusted for beta) and information ratio (excess returns adjusted for tracking error). This is not to mention attribution analysis, risk decomposition, and myriad other types of analysis we conduct. Beyond this, we also engage in qualitative analysis, evaluating the depth of the team, caliber of their resources, soundness of investment process, and much more. Suffice it to say that rolling period returns are the tip of the iceberg in terms of what LPLR’s IMR team can do on behalf of clients.