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The Markets January 29, 2007
Best Performing Funds Fail to Repeat Performance
Advisers who use performance as the sole, or significant, driver in investment selection might want to rethink their strategy because the latest study of fund performance over time from Standard&Poor’s found that very few funds top performing funds managed to consistently repeat top-half or top-quartile performance in 2006.
Reported by Fred Schneyer
Specifically, over five years ending December 31, 2006, only 71 (13.2%) large-cap, 16 (9.9%) mid-cap and 24 (10%) small-cap funds hung onto their top-half ranking over five consecutive 12-month periods. A total of eight (3%) large-cap, two (2.5%) mid-cap and zero small-cap funds maintained a top-quartile ranking over the same period.
“Standard & Poor’s research suggests that screening for top-quartile funds, as the sole basis for an investment decision, is inappropriate,” said Srikant Dash, Index Strategist at Standard & Poor’s, in the news release. “Very few funds repeat a top-quartile performance. Furthermore, Standard & Poor’s research shows that a healthy percentage, and in most cases a majority, of top-quartile funds in the future will most likely come from the ranks of prior period second and third quartiles.”
Looking at longer term performance, only 17.3% of large-cap offerings with a top-quartile ranking over five years ending December 31, 2001 maintained that ranking over the next five years ending December 31, 2006. Only 10.4% of mid-cap and 17.7% of small-cap funds kept a top-quartile performance over the same period.
Meanwhile, 37% of large-cap, 31.6% of mid-cap and 47.5% of small-cap funds with a top ranking over five years ending December 31, 2001 maintained a top ranking over the next five years ending December 31, 2006.
“The characteristics of top performing funds are similar,” said Rosanne Pane, Mutual Fund Strategist at Standard & Poor’s, in the news release. “On average top funds tend to have more experienced management and lower expenses relative to their peers. They also focus on minimizing losses during down markets.”
More information is at www.standardandpoors.com.