An article in The Wall Street Journal recaps the results of the quarterly Winners’ Circle, a ranking of mutual funds according to their returns in the most recent 12 months.

The Winners’ Circle contest looks at diversified U.S.-stock mutual funds with more than $50 million in assets and at least a three-year record, based on preliminary data from Morningstar. It excludes index funds, leveraged index funds and inverse leveraged index funds.

For the fourth quarter in a row, the winner is Legg Mason Opportunity Trust (LMOPX, class C shares):

Legg Mason Opportunity returned 63.25% over the 12 months through September, according to Morningstar Inc. Nine stocks of about 60 in the $1.4 billion portfolio doubled in the past year, its managers calculate, while fewer than 1% of companies in the S&P 500 did so.

As a follow-up to a previous post, let’s again take a closer look at this fund from the Alpholio™ perspective. Here is an updated cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for LMOPX

As the chart indicates, in the 12 months through August 2013 the cumulative RealAlpha™ for the fund was relatively flat. How is that possible, given that the fund had such a stellar return in that period?

The chart shows the cumulative RealAlpha™ since early 2005. The fund severely underperformed in 2008 (return of -65.5%) and 2011 (-34.9%), so despite its recent rebound and other years of outstanding returns, it has not yet started to generate a substantial RealAlpha™ on a cumulative basis. In other words, the penalty of poor past performance is factored into the cumulative RealAlpha™, similarly to how investment returns, both positive and negative, are compounded over time.

Although it is tempting to focus on short-term returns, Alpholio™ takes a longer view of the fund’s performance. As Bill Miller, the manager of the fund, states:

“there is no money manager that never has had a bad period.” He says “a streak creates a set of expectations that don’t make any sense and that it’s hard to live up to. If it’s positive, people are likely to end up disappointed.”

Consistent, long-term excess returns on a truly risk-adjusted basis are key to adding value for the fund’s investors.

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