Is past performance a reliable indicator of future results?

Is past performance a reliable indicator of future results?

03 February 2020

The simple answer is no!

Every year, a study carried out by Dimensional Fund Advisers analyses returns of US-based mutual funds to determine how many funds outperform an industry benchmark after costs.

For equity funds, over the past 5 years, not all funds survived, and only 26% of funds survived and outperformed after costs. Beyond 5 years, the percentage of top performing funds that survived and outperformed was even smaller, dropping to 14% after 15 years.

So why not just pick the funds that outperformed?

The study (see above image) turns back the clock three years and imagines investing using past performance as a guide. It looks at returns over the previous three - year period and considers only funds that were in the top 25% (the top quartile). It then takes those top performers and observes how they performed over the subsequent three years.

The study performed this exercise for the past 12 years and found that, on average, only 26% of top quartile equity funds over three years repeated their top-quartile performance for the next three years.

You could read this result to mean that a few skilful managers are able to perform well over more than a handful of years. That might be the case, but the number of funds that did repeat their top quartile performance was about the same as you would expect by chance alone.

At JJFS, our approach to investment is based on evidence and academic studies – not the throw of a dice. We look to help you avoid the most common wealth-damaging mistakes and put more in the pockets of you and your family.