Survey finds fund past performance is a key indicator

[Karen Mc]

<!--EZCODE BOLD START--> Oh Dear !<!--EZCODE BOLD END--> :rollin

Past performance is a key indicator when choosing which funds are more likely to enjoy top-quartile performance in the future, according to a report commissioned by the Investment Management Association.

Ima claims the study by consultant Charles River Associates is the most comprehensive ever undertaken. It monitored 940 funds from four UK equity sectors - all companies, equity income, smaller companies and equity & bond - over 21 years. It found that a fund with a top-quartile pedigree had a better than 25 per cent chance of future top-quartile performance while a bottom-quartile fund had more than a 25 per cent chance of poor future performance.

In the UK equity income sector, a top-quartile fund had a 33.5 per cent probability of remaining in the top quartile over three years after initial and annual charges were deducted. This probability increased to more than 40 per cent if held for more than seven years.

Ima says the research not only demonstrates a link between past and future performance but also increases the need for the FSA to introduce a standardised format for presentation of past performance data in marketing material. Chief executive Richard Saunders says:<!--EZCODE BOLD START--> "These numbers do not show that picking last year's winner guarantees outperformance next year. But it suggests that, on average, past performance relative to peer group has a tendency to carry forward into the future for both strong and weak performance."<!--EZCODE BOLD END-->

 

[US]

Past Performance

This is fascinating, not least because it directly contradicts earlier research into the same issue.

Anybody have a link to the study?

 

[rainyday]

which includes a link to the full report.

 

[US]

Past performance

Thanks, Rainyday. I've got the report, but it's 60 pages long so it will take a while to digest.

One thing disappoints me. The report explicitly does not compare the funds investigated either with a benchmark index or with a comparable tracker fund, so it isn't necessarily going to be much help to someone who is trying to choose between actively- and passively-managed funds.

 

[endowed]

Continuing the “actively and passively-managed funds” theme, last Saturday’s FT had an interesting [broken link removed]about this subject while also commenting on the Investment Management Association report.

<!--EZCODE QUOTE START--><blockquote>Quote:<hr> Richard Saunders, chief executive of the IMA, claims the research shows "conclusively" that past performance data can help investors and their advisers. But a review by the Financial Services Authority, the City Regulator, found no evidence that this is true. The FSA said this week that there is nothing in the IMA findings to overturn that conclusion<hr></blockquote><!--EZCODE QUOTE END-->.

According to the FT and which US also alludes to, index tracking funds were completely excluded from the IMA analysis.

 

[US]

Past Performance Survey

Just to clarify - it's not a criticism of the IMA study to say that it excluded trackers. Trackers weren't relevant to the question which the study sought to answer. But it would have been interesting, for comparative purposes, if they'd looked at trackers as well.