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What is the best financial media for investment tips? [video]

Why do fund managers often fail to reproduce their past success?

Open the money pages of a newspaper and chances are you’ll see articles about the best funds to buy

But just because the funds perform well now, doesn't mean they will in the future...

Tim Edwards of S&P Dow Jones explains further...

RP: Hello there. Open an investment magazine or the money pages of a newspaper and chances are you’ll see articles about the best funds to buy. Almost invariably, the funds featured are ones that have performed well in the past. But that doesn’t mean they’ll do so in future. Persistent outperformance is extremely rare. Tim Edwards is senior director of Index Investment Strategy at S&P Dow Jones.

TE: Period by period, year by year we look at the top quartile of managers and we see how many of these top quartile managers where top quartile the year after, the year after and the year after. What we found there is I’m afraid, bad news for the believers in the hope that the past is a guide to the future. And in fact, it is even worse than you might hope. So the chance, historically, of a manager remaining in a top quartile for five consecutive years is actually quite a bit worse than the chance of getting heads five times in a row.

RP: So, why is there so little persistence in outperformance? One explanation is that it’s extremely hard to outperform. Another is that outperformance is sometimes down to luck.

But Tim Edwards believes there’s another reason why fund managers often fail to reproduce their past success.

TE: What tends to happen is that funds that perform very well are rewarded with vast influx of assets. That additional money can perhaps make it harder for them to match the returns that they were achieving beforehand - so that may be the reason, certainly in terms of the data. What it tells us is that picking best performing managers I’m afraid is no panacea from picking a good manager.

RP: So, don't be swayed by past performance. It doesn’t predict future performance. In fact, you might be buying into a fund at just the wrong time. Thanks for watching. Goodbye.

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