Trust Services and SIMPLIFY
Is Past Performance Really Irrelevant?
June 4, 2018
Most investors have been told that past performance is a poor indicator of future performance. However, at some point, many investors tend to incorporate performance in investment decision-making. After all, performance can be hard to ignore. So how long should an investor endure unsatisfactory performance before moving to a different mutual fund? According to a new study
published by Morningstar that addresses this question, the answer is at least 10 years.
According to the study, active equity funds that outperformed their benchmarks over a full 15-year period experienced a Longest Underperformance Period (LUP) of nine to 11 years. This means that, on average, investors who were hoping to hold outperforming funds over this 15-year period needed to have the patience to endure a 10-year period of underperformance at some point!
Morningstar also found, via simulations, that it is only when the evaluation period is extended past 15 years that the average LUP for skilled managers sharply diverges from that of unskilled managers. In other words, to tell the difference between a fund manager who is really good from one who is just lucky, you will have to wait much longer than 15 years to be sure.
This research has an important implication for investors: past performance has little relevance for helping you make future investment decisions. In practice, there is no easy way of telling whether a bad stretch is attributable to luck or skill because it’s normal for skilled managers to underperform for long stretches. Thus, performance should rarely, if ever, be a reason for firing (or hiring) a manager.
We believe that there are two ways investors can apply this counter-intuitive learning:
Reset your expectations. Don’t expect consistent outperformance from your fund managers. Recognize that deviations from market benchmarks can be normal and do not mean that a manager is unskilled most of the time.
Change the way you pick fund managers. Investors are better off hiring managers who can offer exposure to certain asset classes based on an investment process, not based on past performance.
At Ronald Blue Trust, our investment process is ongoing and centers on our clients’ financial plan. Instead of measuring our success against market benchmarks, we believe a more reasonable definition of success is how well an investment strategy meets our clients’ future cash flow needs. If you would like to learn more about our investment process, please contact your Ronald Blue Trust advisor by calling 800.987.2987 or emailing
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Disclaimer: Ronald Blue Trust obtains historical and other information from a wide variety of publicly available sources. The information and material provided is for informational purposes only and is intended to be educational in nature. We have taken reasonable care and precaution to ensure that the information is fair and accurate, or has been compiled from sources believed to be reliable. Nevertheless, we do not make any representations or warranty, express or implied, as to the accuracy, completeness, or fitness for any purpose or use of the information. The information may not in all cases be current and it is subject to continuous
change. Accordingly, you should not rely on any of the information as authoritative or a substitute for the exercise of your own skill and judgment in making any investment or other decision. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investments, accounting, tax, and legal matters or other matters before taking any action. We shall not be liable for any direct, indirect, or consequential loss arising from any use of or reliance on the information contained here. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Investing involves risk and the value of your investment will fluctuate over time and you may gain or lose money. Past performance of any security, sector or investment style is not necessarily indicative of future results.