Don’t be fooled: 2015 fund win­ners typ­i­cally lose money the fol­low­ing year.

The Denver Post - - BUSINESS - By Stan Choe The

It’s tempt­ing to look at which mu­tual funds did best in 2015 and just in­vest in those. Win­ners win, right? Not in the in­vest­ing world. It’s tough for funds to stay on top, and last year’s win­ners reg­u­larly turn into this year’s losers.

Look at what hap­pened to the hand­ful of in­dex and ac­tively man­aged mu­tual funds that re­turned 40 per­cent or more in 2014. Their re­turns tow­ered over the 14 per­cent that a Stan­dard & Poor’s 500 in­dex fund pro­duced.

But seven of the 10 went on to lose money the fol­low­ing year. You would have had a slightly bet­ter chance of mak­ing money in 2015 by pick­ing a fund at ran­dom.

The fig­ures dove­tail with a raft of stud­ies that sug­gest in­vestors should con­sider much more than just past per­for­mance when choos­ing funds.

It turns out that even when funds per­form well over long pe­ri­ods, com­pared with sim­i­lar funds, it doesn’t mean they will con­tinue to do so.

A study re­leased by Morn­ingstar last week looked at fund re­turns in 14 cat­e­gories, go­ing back to 1996. It iden­ti­fied which high-yield bond funds were in the top 20 per­cent for the five years through 2001, then checked to see how they per­formed over the en­su­ing five years against the funds that had been in the bot­tom 20 per­cent.

The re­searchers found only small dif­fer­ences in en­su­ing suc­cess for the top and bot­tom funds in most cat­e­gories, as long as the time frame was longer than a year.

“Even the best man­agers gen­er­ally do not con­sis­tently out­per­form,” the re­searchers wrote in their re­port. “Those who lack the pa­tience to stick with an ac­tive man­ager through mul­ti­year rough patches may be bet­ter off in a low-cost in­dex fund.”

S&P Dow Jones Indices, mean­while, keeps its own score­card of how many mu­tual-fund man­agers are able to stay in the top quar­tile or even top half of their cat­e­gories. Its ver­dict: very few.

Of the 539 funds that ranked in the top half of large-com­pany funds in the year through March 2011, 52 per­cent re­peated the feat the fol­low­ing year. That’s only slightly bet­ter than a coin flip.

The dif­fi­culty fund man­agers have in stay­ing on top serves as a re­minder to re­sist the temp­ta­tion to hop from one fad to an­other. In­vestors are no­to­ri­ous for chas­ing af­ter what­ever’s per­form­ing well and flee­ing what­ever’s strug­gling.

The largest ac­tively man­aged stock fund, Amer­i­can Funds’ Growth Fund of Amer­ica, re­turned an an­nu­al­ized 7.2 per­cent over the decade through 2015, for ex­am­ple.

That’s how much in­vestors would have made if they bought at the start of that decade and sim­ply held it. But most in­vestors didn’t do that. In­stead, many bought more shares when per­for­mance was good and sold when per­for­mance lagged. That means the av­er­age in­vestor in the fund got a 5.3 per­cent an­nual re­turn over the decade, Morn­ingstar re­ported.

In­vestors also should look to keep their fund ex­penses low. A fund with high fees has to per­form much bet­ter just to match the per­for­mance of a low-fee fund.

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