Most research that considers investor outcomes reports on unconditional or conditional (as in “alpha” estimates) arithmetic means of returns that are measured over relatively short horizons, most often monthly. In contrast, investment and decision horizons can stretch to decades, and differ across investors. We posit that many investors are concerned with the compound returns that accrue over longer horizons, propose that empirical measures of investment performance should therefore consider a variety of return measurement horizons, and report on compound returns to U.S. equity mutual funds at the monthly, annual, decade, and full-sample horizons. We also shed light on the respective roles of return skewness and mutual fund expenses, and we tally the full-sample dollar gain or loss to mutual fund investors in aggregate, on both a fund-by-fund basis and in total. The results verify that compound long-horizon returns often contain important information that is not readily apparent in the distribution of short-horizon returns. For example, some funds with positive monthly performance estimates have negative long-horizon abnormal returns.

We study a broad sample of nearly 8,000 U.S. equity mutual funds during the 1991 to 2020 period. We show that the percentage of funds that outperform market benchmarks decreases with the horizon over which returns are measured. In the monthly data, fund returns exceed the matched-month return to the SPY Exchange Traded Fund (taken as a proxy for the overall market that investors could readily have captured) for 47.2% of observations. The percentage of sample funds that generate buy-and-hold returns that exceed buy-and-hold returns to the SPY decreases to 41.1% at the annual horizon, 38.3% at the decade horizon, and 30.3% at the full-sample horizon. In fact, over 20% of funds fail to even outperform one-month U.S. Treasury Bills at the full-sample horizon.

These results reflect a prominent dimension by which long-horizon returns contain different information than short-horizon returns: the cross-sectional distribution of long-horizon fund buy-and-hold returns is strongly positively skewed, while such skewness is not observable in monthly returns. This positive skewness in compound long-horizon returns is of substantial practical importance. Financial planning (e.g. at pension funds) is often based on assumptions regarding mean returns. Aside from the active debate as to whether the assumed mean returns are appropriate, in a positively skewed distribution a potentially large majority of possible future realizations are less than the mean outcome. Of course, while strong positive skewness implies that many funds underperform, some funds perform very well. Out of 7,883 sample funds, 442 delivered a positive full-sample compound return more than twice as large as the compound return to the SPY over the matched months, and 160 delivered compound returns three times as large as the SPY during the matched months of the full sample.

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