Capital eBook: Does Past Performance Really Matter?

A fund’s past performance is really not an indicator of future performance, according to an S&P Persistence Scorecard.


Picking funds based largely on past performance is for suckers. In the five years ending March 31, 2011, just 1.56 percent of all domestic funds repeated top-half performance over five consecutive 12-month periods, according to “The S&P Persistence Scorecard: Does Past Performance Really Matter?” report issued in June. Only 0.96 percent of large-cap funds, 1.14 percent of mid-cap funds, and 2.59 percent of small-cap funds kept a top-half ranking over five consecutive 12-month periods, S&P found.

And it keeps getting harder: Looking at performance again over five consecutive 12-month periods, of domestic funds in the top quartile in March 2007, just 13.06 percent remained in March 2008, 5.46 percent in March 2009, 0.39 percent in March 2010, and none by March 2011.

“Past performance is really not an indicator of future performance,” says Aye Soe, an S&P global research & design director. In the top-half example, random expectations would suggest a 6.25 percent rate, so ranking in the top half “is rarer than a random event,” she says. And mid-caps saw more style drift over the time studied. “Mid-cap is a unique space. They are stuck in the middle, and they may drift to large-cap or small-cap to take advantage of opportunities,” she says.

Read the entire article in this week’s Capital eBook (June 21, 2011).

Additional stories in the Capital eBook:

Low-Risk Stocks

Low-Risk Stocks

Lower Equity Risk Without Giving Up Return
Some money managers are picking low-risk stocks for more than a defensive play.

Alternative ETFs

Alternative ETFs

Institutions Jump on Bandwagon for Alternative ETFs
Money managers are increasingly turning to Exchange Traded Funds to facilitate essential fund management practices.