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Mutual Funds performance histories not so hot



By Dian Vujovich

It’s not easy selecting a mutual fund to plunk your dollars into. In addition to the thousands available and dozens of investment categories to choose from, performance records are all over the board. That said, investors have often looked to a fund’s past performance history in hopes of it performing similarly in the future.

Trouble is, there isn’t an investment advisor out there, or piece of mutual fund literature, that doesn’t warn about how a fund’s past performance is no indication of how it will perform in the future.

Twice a year S&P publishes its S&P Persistence Scoreboard report that looks at the consistency of equity fund performance figures over the past few years. I spoke with Aye Soe, director of index fund research at S&P about the results. We both agreed that picking a fund based on its past performance wasn’t the best—-or only—measurement to use.

Results from the most recent Scoreboard reflect only those of pure equity funds. That is, no ETFs, index funds, ultra- or enhanced-type funds, bond or those with bond components were included. And, few retain their top-half or top-quartile ranking

Results for the top-half ranking funds were less than stellar when looking at only the past 3- and 5-year periods. Then again, that time period did have its challenges.

Nonetheless, over the past 5 years –ending on March 2011—less than 1 percent (0.97 percent, specifically) of large-cap funds, 1.14 percent of mid-cap funds and 2.5 percent of small-cap funds were able to remain a top-half ranking.

As for 3-year returns, the results were worse—except for small-cap funds. One-half of 1 percent of large-cap funds, 0 percent of mid-cap ones, and nearly 3 percent (2.92 percent) of small-cap funds had consistent performance.

So much for letting a fund’s past performance be an investor’s best-guide-to-buy indicator.

Then again, what is? Soe will tell you other factors such as the fund’s management and investment strategies also play a big part. I agreed but also know that a fund’s bottom line performance figure reflects the net result of all of that.

Perhaps another way to evaluate a fund before investing in it is to evaluate how you—the investor—think. What size companies do you think are worth investing in—small-, medium-or large caps? Then ask yourself about specific investment categories, or places around the globe you’d like to invest.

If all that thinking is too much to handle, don’t overlook index funds. They are cheap, come in a variety of flavors from various sources and often out-perform managed funds.


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