For Immediate Release: Monday 21 January 2002

INDEPENDENT STUDY SHOWS

THAT PAST PERFORMANCE MATTERS

New research challenges the notion that consumers should not look at past performance when taking investment decisions.  A review of academic literature by the respected economic consultancy Charles River Associates (CRA), commissioned by AUTIF, demonstrates that:

• Fund performance - good and bad - does persist
• Consumers can make profitable use of past performance information to take investment decisions
• Withholding past performance information is detrimental to consumers

Richard Saunders, Director General of AUTIF, said:

“This study, the most comprehensive of its kind, demonstrates conclusively that taking investment decisions without access to past performance data is unwise. We must conclude that the FSA’s decision to exclude this information from its comparative tables was a mistake which is detrimental to consumers. 

“We believe the FSA should now reconsider this decision. The inclusion within the tables of past fund performance data, in a standard format, as recommended by the FSA’s own Task Force, should be implemented as soon as possible.”

The CRA research is being conducted in two stages:

the first report, published today and entitled, “Performance persistence in UK equity funds – a Literature Review”, considers the full range of existing academic and professional literature on the question of past performance;

the second report, to be published later in 2002, will provide a statistically and economically robust analysis of how consumers can use information about performance persistence.

Today’s report is the most comprehensive UK review of published research on the persistence of performance in UK and US mutual funds.  Its principal conclusion – that there is considerable academic research suggesting that persistence in performance does exist – challenges the position taken by the FSA in drawing up its comparative tables.

There is, for example, overwhelming evidence that poor performance persists.  Without performance information, therefore, consumers might invest in poorly performing funds, and management incentives to perform well could be reduced.  As one of the studies quoted by CRA puts it:

“There is strong empirical evidence that losing mutual funds repeat. Thus divesting one's losing funds would enhance investor returns.”

Many researchers have also found persistency of strong performance.  Independent financial advisers have an important role to play in highlighting such issues for their clients.

CRA examine in detail the work done for the FSA by Bacon & Woodrow in 1999 and the FSA’s own Occasional Paper  “Past Imperfect? The performance of UK equity managed funds” (OP9), written by Mark Rhodes and published in 2000.   CRA question both the methodology and approach of both these projects, demonstrating their failure to take full account of the available literature, including significant misrepresentation of the conclusions of work by US academic Mark Carhart.  The FSA’s OP9 paper overlooked two thirds of published research in the US, including some of the most recent and rigorous work.

Continuing, Richard Saunders said:

“Past fund performance is never a guarantee of future performance.  But in recent years, government and regulatory policy has been driven by the assumption that there is no relation between the two.  The work we are publishing today decisively shows that view to be outside the consensus of academic research.

“The significance of this for consumers is that profitable investment strategies can be developed using past performance as one parameter.  Past performance should never be the only criterion, but it has a clear role to play.

“The paper also highlights the relative lack of robust research on the UK market, as compared with the US.  The second stage will therefore be a detailed study of performance persistency the UK, with particular reference to the value of information to consumers.”

 Ends

For further information please contact:

Richard Saunders, AUTIF - +44 (0)20 7831 0898

Clare Arber, AUTIF - +44 (0)20 7831 0898

Tim Giles, Charles River Associates - +44 (0)20 7664 3700

Notes to Editors:

The project is being sponsored by AUTIF, Fidelity International, Standard Life Investments, and Skandia Multifunds.

A summary of the Charles River Associates report “Performance persistence in UK equity funds – A Literature review” is attached.

Attachment 1- Summary

Attachment 2 - Full Report