Does Past Performance Matter?
One of the many pitfalls to investing is chasing performance. Investors generally gravitate towards funds that have done well in the recent past. But how likely are they to do well in the future? The most recent S&P Persistence Scorecard sheds some light on this question.
“Very few funds manage to repeat top-half or top-quartile performance consistently. For the five years ending September 2011, only 9.72% of large cap funds, 6.08% of mid-cap funds and 3.27% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Random expectations would suggest a rate of 6.25%.”
“Looking at longer-term performance, 12.23% of large-cap funds with a top-quartile ranking over the five years ending September 2006 maintained a top-quartile ranking over the next five years. Only 3.08% of mid-cap funds and 20.22% of small-cap funds maintained a top-quartile performance over the same period. Random expectations would have suggested 25%.”
“While top-quartile and top-half repeat rates have been at or below the levels one expects based on chance, there is consistency in the death rate of bottom-quartile funds. Across all market cap categories, fourth-quartile funds have a much higher rate of being merged and liquidated.”
- Searching for funds that outperform consistently will most likely be a counterproductive endeavor.
- Investors can consistently outperform moderately by lowering their expenses through index funds.