Research and Insights Library

Should You Bet Your Future on a Manager’s Past Performance?

When investors are confronted with the vast menu of mutual funds on offer, they face a daunting challenge: how to distinguish among thousands of possible options. Investors must choose from countless different strategies and fund managers, each with their own spin on the “right” way to manage assets. Moreover, the menu is constantly being reshuffled. Each year new funds enter the marketplace, often with much fanfare, and unsuccessful funds (more quietly) liquidate or merge.

Thus, it is hardly surprising that so many investors are overwhelmed by the choice, and so fall back on easily understood data points that ostensibly separate the universe of funds into “good” and “bad” options. In particular, investors tend to heavily weight a fund’s past track record in assessing its performance potential in the years to come. But this begs the question: is a fund’s history any real indication of how it will perform in the future?

How Persistent is Superior Performance?
To answer this question, Gerstein Fisher created a universe of the 930 domestic equity mutual funds from the Morningstar database that had a full 15 years of performance history. We examined the ability of these funds to maintain any significant out- or under-performance over time in their respective categories (i.e., we compared large cap growth funds with the large cap growth universe of funds, and small cap value with small cap value funds).

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