When investment markets are particularly volatile, investors are more likely to participate in performance-chasing behaviour that is potentially detrimental to their long-term returns.
Often performance chasing involves investors dumping an actively-managed investment fund that has slipped down the short-term performance ranking and switching to a fund that is riding high in the latest performance tables.
A fundamental flaw with such an approach is that today’s winners may become tomorrow’s losers in terms of performance. And today’s losers could well become tomorrow’s winners.
As recent Vanguard research highlights once again, a fund’s past performance is not an accurate guide to its future performance. And chasing performance by switching between funds as their performance rises and falls is likely to be a wasted and costly exercise.
In this research, analysts first ranked all actively-managed US share funds in terms of their initial excess returns over their stated benchmarks in the five years to December 2010. And then the performance of the funds was tracked over the next following five years to December 2015.
"If managers were able to provide consistently high performance, we would expect to see the majority of first-quintile funds remaining in the first quintile," the analysts wrote. However, the once top-performing managers "faired hardly better that we would expect from a random distribution".
Of the 1100 share funds in the top quintile for the five years to December 2010, only 16.2 per cent remained in the top quintile for the subsequent five-year period. Almost a quarter had slid to bottom quintile while 12.5 per cent had merged or been liquidated.
And of the share funds in the bottom quintile for the five years to December 2010, 15 per cent had risen to the top quintile for the subsequent five-year period. Only 9.4 per cent remained in the lowest quintile however almost 40 per cent were merged or liquidated.
This research underlines that consistence outperformance by fund managers is rare and that investors can pay a high price in forfeited returns by chasing performance.
Finally, other Vanguard research shows that investors over the medium-to- long term often underperform the managed funds currently holding their capital because of their adoption of a hire-and-fire, performance-chasing strategy.
Taking such approach can mean investors consolidate losses when a once top-performer falters yet miss out on gains when a one-time poor performer begins to outperform.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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