What is the 'Average Annual Return - AAR'

The average annual return (AAR) is a percentage used when reporting the historical return, such as the three-, five- and 10-year average returns of a mutual fund. The average annual return is stated net of a fund's operating expense ratio, which does not include sales charges, if applicable, or portfolio transaction brokerage commissions.

BREAKING DOWN 'Average Annual Return - AAR'

When you are selecting a mutual fund, the average annual return is a helpful guide for measuring a fund's long-term performance. However, investors should also look at a fund's yearly performance to fully appreciate the consistency of its annual total returns. For example, a five-year average annual return of 10% looks attractive; however, if the yearly returns (those that produced the average annual return) were +40%, +30%, -10%, +5% and -15% (50 / 5 = 10%), performance over the past three years warrants examination of the fund’s management and investment strategy.

Components of Mutual Fund AAR

There are three components that contribute to the AAR of an equity mutual fund. Share price appreciation results from unrealized gains or losses in the underlying stocks held in a portfolio. As the share price of a stock moves fluctuates over a year, it proportionately contributes to or detracts from the AAR of the fund that maintains a holding in the issue. The American Funds AMCAP Fund’s 2.74% holding of Oracle Corporation, a stock it has owned since 2003, has contributed to the portfolio’s 10-year AAR of 8.15% through June 23, 2016, as the company’s stock rose from $10.88 on April 1, 2003, to a close of $40.83 on June 23, 2016.

Capital gains distributions paid from a mutual fund result from the generation of income or sale of stocks from which a manager realizes a profit in a growth portfolio. Shareholders can opt to receive the distributions in cash or reinvest them in the fund. Capital gains are the realized portion of AAR. The distribution, which reduces share price by the dollar amount paid out, represents a taxable gain for shareholders. A fund can have a negative AAR and still make taxable distributions. The Wells Fargo Discovery Fund paid a capital gain of $2.59 on Dec. 11, 2015, despite the fund having an AAR of negative 1.48%.

Quarterly dividends paid from company earnings contribute to a mutual fund's AAR and also reduce the value of a portfolio's net asset value. Like capital gains, dividend income received from the portfolio can be reinvested or taken in cash. Large-cap stock funds with positive earnings typically pay dividends to individual and institutional shareholders. These quarterly distributions comprise the dividend yield component of a mutual fund's AAR. The T. Rowe Price Dividend Fund has a trailing 12-month yield of 1.23%, a contributing factor to the fund’s one-year AAR of 5.55% through June 23, 2016.

RELATED TERMS
  1. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
  2. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  3. NAV Return

    The change in the net asset value of an exchange-traded fund ...
  4. Total Annual Fund Operating Expenses

    For a mutual fund or other type of fund management structure, ...
  5. Capital Gains Distribution

    The payment of proceeds prompted by a fund manager's liquidation ...
  6. Pooled Funds

    Funds from many individual investors that are aggregated for ...
Related Articles
  1. Investing

    VCDAX: Comparing Consumer Discretionary Mutual Funds to XLY

    Discover the top four consumer discretionary funds positioned to rebound on the back of the rise in consumer spending and learn how they could help your portfolio.
  2. Investing

    FSENX: Portfolio Trends in 2016

    Discover the portfolio trends in Fidelity Select Energy Portfolio and learn how it's positioned to grow with the rebound in oil prices in 2016.
  3. Investing

    FMAGX: Fidelity's Mutual Fund Peter Lynch Was Once a Manager

    Discover the 2016 portfolio trends in the Fidelity Magellan Fund, and learn if they can help your portfolio to maximize profits and minimize losses this year.
  4. Investing

    PRWCX: Portfolio Trends in 2016

    Discover how the portfolio trends in the T.Rowe Price Capital Appreciation Fund helped to keep performance positive in 2016 and learn how it can help your portfolio.
  5. Investing

    TRBCX: Portfolio Trends in 2016

    Learn about the portfolio shifts in the T. Rowe Price Blue Chip Growth Fund for 2016 and consider whether the fund is right for your own portfolio's growth.
  6. Investing

    The 5 Best American Funds

    Discover five of the best-performing mutual funds offered by American Funds, based on the funds' five-year average annualized returns.
  7. Investing

    10 American Funds Mutual Funds with Long Track Records

    Learn about the performance of the mutual funds offered by Capital Group's American Funds that have the longest established track records.
  8. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  9. Investing

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
RELATED FAQS
  1. How do dividends affect net asset value (NAV) in mutual funds?

    Understand how dividends affect the net asset value of mutual fund shares, and how this fits into the calculation of a mutual ... Read Answer >>
  2. How often do mutual funds pay capital gains?

    Find out how often mutual funds distribute capital gains income, including the basics of how mutual funds work and why frequent ... Read Answer >>
  3. Do mutual funds pay interest?

    Find out how and why some mutual funds pay interest, and which types of funds make regular dividend distributions to shareholders ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center