Past returns are of less importance
Analysing past performance to determine which fund manager you should use is useful only if you can distinguish between performance that was the result of an investment team’s skill and that which resulted from luck, David O’Leary, head of fund research in South Africa at Morningstar, says.
It is difficult to call asset managers that have been performing well for 20 or 30 years “lucky”, O’Leary says.
But most managers have not had the same investment professionals for 20 or 30 years, and typically the individual who manages a fund has changed in the past three or four years, he says. The time it will take to do research into past performance may make the exercise less worth your while than looking for the other characteristics that are the hallmarks of a good fund manager.
O’Leary says that good performance does not always create good experiences for investors. You should not underestimate how volatility can elicit the wrong behaviour from investors, he says.
It is human nature to respond with good feelings to a fund that is performing well and to sell one that is doing badly, but the investment processes and market cycles of most funds take them through up and down cycles.
When investors disinvest during a fund’s down cycles and reinvest when the fund is again producing good returns, they ruin their chances of earning the returns the fund manager achieves for the fund. The investors’ returns will be different to the timeweighted returns measured for the fund over a particular period.
O’Leary says it is not inconceivable for a hypothetical fund in the United States to have returned 15.05 percent a year between 1997 and 2006, whereas the investors in the fund received an average negative return of –1.46 percent. This is because investors typically invested when the market peaked in 1999 and disinvested throughout the subsequent market fall and the market recovery from 2003.