By and large, both investors and fund professionals rely heavily on past performance in their fund selection process. The problem is that past performance is of little use in identifying funds or managers who will deliver superior future performance relative to their peer group. Numerous studies have failed to unearth a significant positive correlation between past relative performance and future relative performance. The only correlation found has been the consistency of managers with very bad returns to continue to post bad returns in the future.
Our experience evaluating active managers leaves us less than surprised by the inability of winners to consistently repeat. Our research indicates that even skilled managers’ past success often sows the seeds of their future underperformance. There are a variety of reasons that we have identified as to why maintaining an investment edge is difficult:
The fact that track records are not useful in predicting future relative performance is the basis on which index fund proponents conclude that low cost index funds are the better choice. But we disagree with the underlying premise. The fact that track records are not predictive is not tantamount to concluding that superior future performers can’t be identified in advance. It simply means that the track record does not provide sufficient information to do so. Our approach to fund research recognizes that past performance is useful only as a tool for screening funds to identify those that may be worthy of further research. Value added comes from identifying why a fund performed well in the past, determining if the portfolio management team has an identifiable edge and assessing whether the edge (if one exists) is sustainable.
A Decade Past, the Decade to Come
The last decade has seen U.S. stocks significantly outperform non-U.S. stocks, large caps outperform small caps, and growth strongly outperform value. And while the dominance of these trends has been unrelenting, we have already begun to see the last decade’s major market trends starting to reverse. In this post, we look back on the last 10 years and consider what to expect as investors over the next 10.
Litman Gregory Joins iM Global Partner
We would like to share some important and exciting news about our company’s future. After much due diligence and careful thought, the firm’s principals and founders have decided to take a significant step toward growing our resources and ensuring our ability to excel for generations to come by joining iM Global Partner, a privately held global investment services firm.