The Past Is Not a Guarantee of Similar Future Outcomes!
In investment performance evaluation as in love, past performance is not indicative of similar future performance, or so the saying goes. Despite this caveat being prominently displayed on virtually all investment information materials, Investors still give a significant amount of weight (if not the entire weight), to past performance information in deciding which investment manager to entrust our life’s savings to.
Are we justified in depending on the past to predict the future? Or are we now like the weather forecasters on TV? Largely, research has shown that the appropriate caveat should be that: ‘Past superior performance does not guarantee future superior performance; however, past poor performance may predict future poor performance’1.
So the answer to this is YES! – and that goes for love too.
But hold on a second, before you go running to pick up the latest performance data, there are still three key problems that you must note:
Performance Evaluation: Factors to Consider?
- The quality of the information that goes into these numbers matter –Garbage in, garbage out (GIGO) still applies
- Other aspects of the manager’s operations are also critical because they are key in the determination of consistently superior performance over time –Philosophy, Processes and People.
- Comparing different managers is meaningless if their methods for generating the performance information is not the same –Consider picking managers that adhere to a common standard for performance presentation such as the Global Investment Performance Standards (GIPS).
Past superior performance does not guarantee future superior performance; however, past poor performance may predict future poor performance
So how do we as investors execute this all-important function of sifting through the data to select the right manager or mutual fund? – do look out for my follow-up posts. As an investor, what factors do you look at to pick an investment manager or mutual fund and why do you use that factor? Has it worked for you? As an investment manager, what are the most popular questions potential investors ask you and how do you address them?
In the meantime, I would love to hear your comments and questions. Please complete our short poll below, your feedback is appreciated.
1Quotes & References from: CIPM 2014 Principles Curriculum – Chapter 2 in Essays on Manager Selection, by Scott D. Stewart, PhD, CFA – Pages 601 & 604