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Historic data can be a useful way of comparing funds – as long as it’s put in context
Thursday 05 Apr 2018 Author: Emily Perryman

Fund managers always warn investors that past performance is not a reliable indicator of future performance. But past performance figures can be really useful when comparing funds and assessing how managers cope in different market conditions.

So how do you use the figures wisely? We spoke to three experts to find out.

What’s wrong with relying on past performance?

It’s tempting to look at short-term past performance figures and buy funds that are riding high in the tables.

The problem is that funds which are at the top of the tables don’t stay there forever. A fall could be just around the corner, whereas funds that are at the bottom could be in line for a revival.

‘The risk for investors, who place too much emphasis on past performance, is that they buy funds just as they are peaking and when strong investment gains have already been made,’ says Patrick Connolly, certified financial planner at financial advice firm Chase de Vere.

‘And they sell funds which have performed badly and so crystallise their losses just as performance is set to improve.’

Even star fund managers with a long, positive track record can fall into difficulties. It’s very unlikely that a fund will be able to consistently outperform through different market cycles.

‘Veteran fund managers that have been held with the highest regard in the industry have all experienced tough times,’ says Simon Molica, active portfolios fund manager at AJ Bell. ‘Names that come to mind include Richard Buxton, Neil Woodford and Anthony Bolton.

‘When market conditions change this can present fund managers with either a headwind or a tailwind to their investment process. For instance, we have recently experienced a market environment which has been very supportive of growth investing and hence value as a style has been out of favour for some time now.’

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Should I use past performance figures at all?

It’s difficult to assess funds without looking at their past performance, but you shouldn’t let historic data be the sole basis of your investment decisions.

Darius McDermott, managing director at Chelsea Financial Services, says: ‘When I compare fund managers I will look at past performance, but it’s not the only thing I assess. I’ll analyse how volatile performance is, and how managers perform when markets go down as well as up.’

McDermott says fund managers who can perform well in declining markets tend to be the good ones.

You should never base your investment decisions on short-term data, as this won’t give you any indication of how the fund reacts to different market cycles.

Chase de Vere’s Patrick Connolly says investors should look for funds that are most likely to produce long-term consistent returns, rather than those you think might produce short-term stellar returns.


How do I use the data intelligently?

It’s important not to look at past performance data without thinking about the external factors that could have skewed the figures.

Try to understand why the fund is outperforming or underperforming – and then consider if anything might change in the future.

To do this you need to have a good understanding of the investment team running the fund and the approach they take.

In some cases the fund may have grown too large.

Some funds may simply be at the top of the tables because their style or sector is currently in favour. If the style or sector becomes out of favour, their performance could soon go
into reverse.

‘Many successful fund managers have experienced periods of underperformance at some point during their careers,’ says Molica. ‘For instance, with a contrarian investment process the point is to go against the crowd – this requires patience and therefore by design will deviate heavily against an index and peers.’

Whenever you’re comparing data, it’s crucial to compare funds in the same sector so that you can get a good idea of how well a fund has done relative to its peers.


What else should I look at?

There are lots of different factors to look at when deciding whether to invest in a fund.

Molica recommends analysing the experience of the individual or team involved in running the strategy; the robustness and repeatability of the investment process driving the fund; and the costs.

‘The industry is more transparent today than ever before, with information being widely available from the fund groups’ websites,’ he says. ‘Documents such as fund factsheets, Key Investor Information Documents (KIIDs) and fund prospectuses should be useful tools when considering an investment.’

Some commentators suggest investors should select funds based on cost rather than past performance. But McDermott says investors
should never let costs drive their investment decisions.

‘The FTSE 100 is at roughly the same level as it was 18 years ago, so if you’d bought a low-cost tracker your return would be entirely based on dividends,’ he argues. ‘A more expensive product with lots of good fund managers would probably have made higher returns.’

McDermott points out that past performance figures are always shown net of all fees, so you can see for yourself whether the costs are worth it.

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