How to Take Advantage of ‘Persistence of Performance’ in Mutual FundsSubmitted by FundX Investment Group on June 21st, 2016
Morningstar’s January 2016 study, Performance Persistence Among U.S. Mutual Funds, found evidence of what academics call “persistence of performance”: funds that have done well recently tend to continue to do well in the coming months and even years.
Morningstar examined funds in 11 different categories over 20 years and concluded:
“Funds that have outperformed over the past year often continue to do so over the next year.”
While Morningstar awards stars to funds based on a fund’s performance over the past three, fiv e and 10 years, it found that longer-term performance like three-, four- and five-year returns were “not much different than a coin toss.”
Decades of Research on ‘Persistence of Performance’ in Funds
This isn’t the first study to find that funds that were recent winners tend to continue to outperform. There’s decades of academic research to back it up, including:
“The net returns of no-load growth mutual funds…that perform well in the most recent year continue to be superior net performers in the near term (one to eight quarters).”
“Funds with high returns last year have higher-than-average expected returns the next year.”
“Mutual fund returns strongly persist over multi-year periods.”
Want to put these findings to work in your portfolio? We can help.
Tips for Investing in Funds with Strong Recent Returns
1. Think about risk as well as return
Buying funds with strong recent performance sounds simple, but if you only focus on returns, you may end up holding very risky funds. So your first step should be to group funds by risk so you can see which funds are doing best compared to other funds with similar risk.
2. Look at a wide variety of funds
A fund may sound like a top performer – it may have gains, it may have even beaten the market – but there may be other funds that have even bigger gains or that have beaten the market by a larger measure. So you’ll also want to make sure you consider a wide variety of funds so you’ll know if a fund is truly one of the top performers.
3. Monitor fund performance regularly
Markets change, and a fund that’s doing well now will eventually fall out of favor, so you’ll need to regularly review performance to know if your funds continue to outperform.
All this is built-in to NoLoad FundX: We separate funds into risk classes so you know upfront how much risk a fund poses. We track different kinds of funds in each risk class so you can easily spot the top performers. And every monthly issue reminds you to check on your funds and see if there are any changes to be made. This process has helped thousands of investors keep their portfolios invested in leading funds for 40 years.