How vital is past performance?

Is looking at a fund’s past performance hindering my investment success?

Johan Krige

Jason Bernic, Financial Planning Coach

at Old Mutual Wealth, responds: Investors are naturally drawn to top-performing, actively managed funds and many investors looking to maximise returns often select funds solely on their previous performance.

This is not the wisest approach to fund selection, as past performance does not necessarily indicate how the fund will perform in the future. The result is a performance-chasing approach in which current funds are sold from a portfolio to make room for recent winners. This behaviour can be misguided: recent research has shown that, over the past decade, a buy-and-hold strategy has outperformed a performancechasing strategy.

Although performance is important in investment decisions, other factors, such as asset allocation, are critical to ensure that the fund meets its targeted return. Fund managers spend enormous amounts of time researching companies, as well as the macroeconomic factors affecting them, and they continually realign their fund composition with their findings. This means that, in one year, it may be best to have a higher weighting in equities, and the next year, if equities are showing lower expected returns, it may be better to invest in fixed-income instruments. The fund manager has all of this information on hand, understands the effect of the current themes in the market, and adjusts the fund accordingly.

To improve the odds of long-term investment success, you need to remain disciplined in your investment approach and avoid the temptation of chasing performance or looking backwards. Know that some periods of below-average performance are inevitable.