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.
Actions to Take in Uncertain Times
In a volatile environment like the one we find ourselves in today, and experienced just two years ago in 2020, we recognize that some investors feel as though they should make changes in their portfolios—even if just to take action.
Research Update on Market Volatility
Given the renewed market downturn, fed by high uncertainty around inflation and the war in Ukraine, we want to share our most-current views and portfolio positioning with clients and followers of our research.
Commentary from Our CIO—First Quarter 2022
In this commentary, we highlight key developments in the global economy and financial markets. The biggest macro event was Russia’s brutal invasion of Ukraine. As is our job, our focus is on the economic and financial market impact of this event. Clearly, the human impact has been devastating and tragic, and our hearts and support are with the Ukrainian people.