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Mutual Fund Past Performance and Future Outcomes


Investors and advisors like to see past performance to see whether a fund is good or bad, and whether they want to pull the trigger and perhaps buy some for a portfolio.

In a study by S&P Dow Jones Indices LLC (December 2013), one of the world's largest index providers and a part of McGraw HIll Financial Inc, they state the following:

"Very few funds can consistently stay at the top.Our studies show that as time horizons widen, the performance persistence of top quartile managers decline. Of the 692 funds that were in the top quartile as of September 2011, only 7.23% managed to stay in the top quartile at the end of September 2013. Similarly, 5.28 of the large-cap funds, 10.31% of the mid-cap funds and 8.15% of the small-cap funds remain in the top quartile...

Looking at longer-term performance, only 7.71% of large-cap funds, 0.88% of mid-cap funds and 9.9% of small-cap funds maintained a top-half performance over five consecutive 12-month periods. Random expectations would sugest a repeat of 6.25%."

Such studies suggest that investors need to be careful when assessing a fund for investment based solely on past performance.

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