It's now official: the past performance of a managed fund is no indicator of how it will perform in the future.
The Financial Services Authority (FSA) in the United Kingdom says, in a detailed report that "it can find no evidence that information on past investment performance can be used to good effect by retail investors in choosing funds."
The 58-page report has looked at the issue of past performance in different ways, but kept coming up with the same answer.
"Repeat performance (if there is any) is both small in size of effect and short lived," the FSA concludes.
"Repeat performance is most evident for smaller poorly performing funds," FSA associate Mark Rhodes says.
(The message here being that holding onto a poorly performing fund in the hope that it will rebound is a waste of time).
"The conclusion from studies of UK unit trusts, and the more reliable of US studies, is that retail investors could not usefully exploit information on past performance."
The FSA says the study will be useful in helping it determine what information is published in comparative information tables. One option that could be considered is banning the use of past performance in advertising material.
"Finding from the literature and our own study do not commend the inclusion of information on past performance in the FSA's comparative information tables," Rhodes says.
Performance reporting is a live issue in New Zealand as there are no hard and fast rules about the use of information published, and there has been criticism over the industry's management expense ratio standard and the way some managers calculate and charge their expenses.
This is important as the FSA points out that expense ratios reduce performance on a little more than one on one basis. Therefore a higher charging fund will produce a worse performance.
The Securities Commission has queried managers' practices in annualising returns, and Investment Savings and Insurance Association chief executive Vance Arkinstall told a funds management conference recently that the managed fund tables published in local newspapers is poor.
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