For immediate release: Monday 14th October 2002

 

PAST PERFORMANCE CAN BE A GUIDE TO THE FUTURE

The IMA today released new independent research which finds that, for UK equity funds over the last 20 years, selecting a fund with top quartile past performance gave a better than average chance of future top quartile performance.

In the most comprehensive study of its kind ever undertaken, economic consultants Charles River Associates conclude that

“…consumers (and their advisers) can use past performance information as a beneficial part of their investment decision-making process”.

This is the second stage of research commissioned by the IMA.  Its purpose was to examine, from a consumer’s perspective, whether past performance persisted into the future. 

Richard Saunders, Chief Executive of the IMA, commented:

“The IMA has always believed that past performance data can help investors and their advisers.  This research, far more thorough than any previous study, shows conclusively that this belief is justified by the facts.

“These numbers do not show that picking last year’s winner guarantees you out-performance next year.  But they do suggest that, on average, past performance relative to peer group has a tendency to carry forward into the future, for both strong and weak performance.  Thus, although past performance should never be the sole reason for choosing an investment fund, it cannot be ignored. 

“The IMA therefore calls on the FSA to introduce a standard format for the presentation of past performance data in marketing material and to add past performance figures to its web-based comparative tables.”

Across the wide range of scenarios tested, covering the bulk of funds available to UK investors, CRA found that “performance broadly persisted in UK equity based unit trusts between 1981 and 2001”.  This was particularly so:

• in all four sectors studied (UK All Companies, UK Equity Income, UK Smaller Companies and UK Equity & Bond Income) over short periods; and

• for the largest two UK equity sectors (UK All Companies and UK Equity Income) over longer periods

Methodology

Over 940 funds from the four UK equity sectors were assessed for performance persistence for time periods of 1 to 7 years over the 21 year period 1981 to 2001 inclusive. 

To ensure that the consumer perspective was maintained:

• Funds that had closed during this period were included; to exclude them would have biased the average fund performance upwards (survivorship bias).  Furthermore, the costs of reinvesting following a fund closure were also taken into account. 

• Absolute returns were measured, rather than the risk-adjusted returns which previous academic studies have used. 

Findings

CRA’s key findings were that:

• If performance were purely random you would expect 25% of top performers to persist in the top quartile. However:

o    selecting a fund with top quartile past performance gave a better than 25% chance of future top quartile performance;

o    selecting a fund with bottom quartile past performance gave a better than 25% chance of future bottom quartile past performance;

• taking charges into account does not negate the degree of persistence - indeed it can actually increase it; and
   

• the results are robust for different time horizons and sectors;

The results have been rigorously tested and found to be statistically significant.  They have also been academically reviewed.

Some key statistics follow.

1. The table below shows the probability of a top quartile fund remaining in the top quartile, after initial and annual charges.

	UK All Cos	UK Eq Inc	UK Sm Cos	UK Eq & B
	%	%	%	%
12 months	37.6	34.3	40.8	33.5
24 months	29.4	31.3	32.4	27.5
36 months	29.1	33.5	26.9	23.2
48 months	29.7	39.2	22.2	26.9
60 months	31.5	44.7	26.2	27.1
72 months	33.0	42.7	32.2	27.7
84 months	38.7	40.7	26.6	21.3

2. This table shows by how much top quartile past performers in the previous year out-performed bottom quartile performers for all four sectors tested:

	UK all cos.	UK smaller cos.	UK equity income	UK equity and bond
Over 1 year	3%	3%	3%	6%

3. And this table shows cumulative out-performance by top quartile past performers over bottom quartile performers for the 2 largest UK equity sectors:

	UK all cos.	UK equity income
Over 2 years	1%	4%
Over 3 years	0%	5%
Over 4 years	2%	8%
Over 5 years	4%	14%
Over 6 years	6%	17%
Over 7 years	8%	16%

 

- ends -

For further information please contact:

Richard Saunders, Chief Executive, IMA, 020 7831 0898

Tim Giles, Principal, Charles River Associates, 020 7664 3700

Clare Arber, Head of Communications, IMA, 020 7831 0898

Notes to Editors:

“Performance persistence in UK equity funds – An empirical analysis” is the second stage undertaken by independent, economic consultancy, Charles River Associates Ltd.  It investigates whether performance persists in UK equity based unit trusts, and whether consumers can use this information to inform their investment decisions.

The full research is available on the IMA website: (  Printed copies are available from the IMA. Please contact Selina Staines on 020 7831 0898.

Following publication of the FSA’s “Report of the Task Force on Past Performance” (FSA 2001) in September 2001, which considered a ban on the use of any past performance in advertising, the IMA commissioned a review of the academic and professional literature written on the issue of performance persistence in unit trusts (known as mutual funds in the US).  The first stage was published in January 2002 (Giles, Wilsdon and Worboys 2002).

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