Today's winners, tomorrow's losers?

09 April 2018 | Investment principles

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A common trap for investors is to assume that today's highest performing investment funds are likely to remain top performers in the future.

However, research suggests today's winners have a strong chance of becoming tomorrow's losers in terms of performance. And today's losers could become tomorrow's winners.

Updated research by Vanguard investment analysts confirms once again, a fund's past performance is not a reliable guide to its future performance.

To test whether funds' stints of outperformance persisted, analysts focussed on all actively-managed Australian share funds over two separate sequential and non-overlapping five-year periods.

Of the 144 share funds in the top performance quintile (top 20 per cent) for the first five years to December 2012, 37.5 per cent remained in the top quintile for the second five-year period to December 2017. Further, 11 per cent had fallen to bottom quintile while 14 per cent had merged or been liquidated.

And of the share funds in the bottom quintile for the first five years to December 2012, 11 per cent had risen to the top quintile for the second five-year period.

In short, the majority of once top-performing funds failed to remain in the first quintile. Yet if high performance was consistently high, the majority of once first quintile funds could be expected to remain in it over the long term.

Performance-chasing investors typically adopt a fruitless hire-and-fire approach. This involves firing the latest non-performers to hire the latest top performers. Such investors tend to lock in price falls when a once top-performer falters, yet forfeit gains if that fired fund begins to outperform again.

A performance chasing, hire-and-fire approach distracts investors from what really matters: developing a long-term, appropriately diversified portfolio, remaining disciplined through changing investment conditions, blocking out market “noise” and minimising investment costs.

 

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
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Robin Bowerman, Head of Corporate Affairs at Vanguard Australia, shares investment and personal finance insights gained from over two decades in the finance industry as writer, commentator and editor.

Robin Bowerman