WHEN it comes to investing, those who buy tracker funds are sometimes regarded with a patronising air; of course, those are fine for the mass market, but sophisticated people pick the outperforming funds. And for those, you have to pay more.
But how does one know which fund will outperform? Any assessment of the past record carries the implication that performance is persistent. But that assumption is highly doubtful. The last study I quoted came from Vanguard, which manages index trackers; some doubted the results on those grounds. This time, the survey comes from S&P Dow Jones Indices, so may be criticised for the same reason. The trouble is that active managers are unlikely to produce research in this area as it is not in this area. And it is worth noting that Morningstar found similar results.
So let us take the 682 domestic US equity funds that were in the top quartile as of March 2013. How many were still in the top quartile a year later? If performance was random, one would expect a quarter to do so; the actual number was 21.3%. By the time one reached March 2015, randomness would suggest 6.25% of funds would remain in top quartile (a quarter of a quarter); the outcome was 5.28%....Continue reading
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