NAV Total Return

Expressed in percentage terms, Morningstar’s calculation of total return is computed each month by taking the change in monthly net asset value, reinvesting all income and capital-gains distributions during that month, and dividing by the starting NAV. Reinvestments are made on the reinvestment date, and daily payoffs are also reinvested daily. The total returns do account for management, administrative, and other costs automatically taken out of fund assets. For ease of use, total returns for periods longer than one year are expressed in terms of compounded average annual returns (also known as geometric total returns).

Benefits

Morningstar does not adjust the total returns for broker commissions, preferring to give a clear picture of the fund’s performance. Total returns do account for management and administrative fees and other costs automatically taken out of fund assets.

For ease of use, total returns for periods longer than one year are expressed in terms of compounded average annual returns (also known as geometric total returns). Morningstar annualizes total returns in order to provide the most accurate account of fund performance.

Origin

Total return is an in-house calculation. Formulas for total return are listed in the "For the Pros" category.

For the Pros

Morningstar determines year-to-date, one-, three-, and 12-month, three-, five-, 10-, and 15-year total returns by calculating the increase in the NAV over that time period including the reinvestment of distributions. We calculate monthly total returns using the following formula:

TRm = {[Ending NAV (1+ Distribution/Reinvestment NAV) - Beginning NAV] / Beginning NAV} x 100

Where:

Ending NAV = current month-end NAV

Beginning NAV = previous month-end NAV

Distribution = amount of distribution

Reinvestment NAV = the price per share on the day the distribution is reinvested.

 

Morningstar then compounds the monthly returns as follows:

TRcumulative = [(1+ TRm1 / 100) (1 + TRm2 / 100)…(TRmn – 1)] x 100

Where:

TRm1 = total return for first month

TRmn = total return for month n

n = number of months in time period

 

In order to generate more usable figures, Morningstar annualizes total returns spanning more than one year, using the following formula:

TRannual = {[1 + TRcumulative/100]1/n ] -1 } x 100

Where:

n = the number of years

 

These compounded average annual returns are also known as geometric total returns.

Morningstar uses NAV, rather than market-price total returns, to produced the Risk-Adjusted Rating, because the market-price returns don't always reflect the returns that fund managers deliver. Net asset value (NAV) represents the performance of the underlying portfolio, net of expenses. Because the star rating is intended to incorporate fund-specific risk, not market risk, it makes sense to use NAV-based returns. In fact, the shorter the time frame, the more likely it is that a fund's NAV and market-price returns will diverge because of premiums and discounts.

Funds that experience increased demand for their shares will have higher market-price returns if share prices rise faster than NAVs. Similarly, the market-price return of shares bought at a premium will be lower than the NAV returns if demand for the shares slows despite consistent NAV performance. Over time, the effects of premiums and discounts tend to smooth out, and market price and NAV returns converge to within a few points of each other. Thus, it's the performance of the underlying portfolio that really counts over time.

Total Returns and Reinvestment

Depending on an investor's specific cash flows, their total returns may differ from the returns in our calculations. This is because Morningstar’s total returns consider the compounded appreciation and income on the (assumed) reinvested amount.

Fund Performance Within Morningstar Category

The Percentile Rank within Category figures allow for a direct comparison of a fund’s performance within its Morningstar Category. To assess the relative performance of funds from different investment backgrounds, total return numbers offer a direct comparison.