Performance chasers set for disappointment
Many investors who invest in a managed fund that has to-date demonstrated strong performance are destined to be disappointed by its subsequent performance, according to a recent analysis by van Eyk Research.
Jonathan Ramsay, head of asset consulting for van Eyk, said an analysis of top performing managers showed that fund outperformance very rarely lasted for more than a few years before it petered out, or worse - took some or all of that outperformance back by underperforming the market index.
Indeed, since the flow of funds from investors into an outperforming manager typically grew exponentially as its level of outperformance increased, Ramsay said that most money would flow into the fund as its performance was peaking.
"By weight of money, many investors in these funds will end up being disappointed", he said.
According to Ramsay, the problem with previous studies on persistency in fund performance was that they used average measures of performance or the results were highly dependent on the time horizon chosen.
"We took a closer look at whether any individual managers had actually provided persistently strong outperformance or whether they had just managed to catch a market wave - a wave which inevitably subsides," he said.
The conclusion, according to Ramsay, was that the only way investors could reliably take advantage of a strongly performing fund was to try to predict periods of outperformance.
They could therefore invest before it occurred rather than chasing previous outperformance that would not necessarily repeat itself.
"Stock-selection doesn't happen in a vacuum, and having a view about the market and the interaction between that and a manager's investment process is very important," Ramsay said.
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