Do Winners Repeat?

Posted on 20/05/2008. Filed under: ineffectiveness of active fund management, lack of predictability |

A common method of choosing active funds is to look at past performance. This can be done with varying degrees of sophistication. The ratings agencies such as Standard & Poors and Morningstar issue star ratings and these essentially combine past investment performance with an assessment of risk in arriving at the number of stars awarded to a fund.

A recent survey has assessed the effectiveness of using past performance in fund selection by investigating to what extent performance is repeated over a series of 5 year periods from January 1982 until December 2006.

I have summarised the results of the survey of top 30 funds for each five year period below:

Initial 5 year period Still in the top 30 five years later Still Top Quartile

Jan 1982-Dec 1986 0/30 4/30
Jan 1987-Dec 1991 5/30 15/30
Jan 1992-Dec 1996 1/30 12/30
Jan 1997-Dec 2001 2/30 6/30

What it tells you is that the chances of selecting an active fund manager who will still be outperforming his peers even five years later are slim to the say the least. This validates the view that active fund managers in general fail to add value. Whilst there are undoubtedly some that have demonstrated out performance the likelihood that you will choose one is remote.

In summary spending time on selecting active fund managers is a fool’s errand as it is unlikely to add value to the performance of a portfolio. If you are a serious investor your efforts are likely to be better rewarded by investing in the market as a whole and aiming for out performance by allocating some of your investments to under valued and smaller companies. Whilst these expose you to greater risk that investing in the whole of the market there is a reasonable probability that this will be rewarded. See my I help you achieve your lifetime goals for reasons that are important to you
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