This guide summarises the findings shown in the FSA Occasional Paper Series 9¹ : Past Imperfect? The performance of UK equity managed funds - August 2000

The paper asks the fundamental question:

“Is past performance any use in determining future performance for retail investors?”

Study 1

A simple analysis was undertaken by WM Company (1999), in comparing active and passive fund management. They examined funds in the top 25% of performers over five year periods in the UK Growth and Income Sector for a period of 20 years (1979 to 1998). The proportion of these funds that remained within the top quartile was then examined.

The analysis discovered that were no more funds in the top quartile than would be expected by chance. The conclusion is that good performance is of no use in predicting the future.

Phelps and Detzel also conducted studies of US fund managers and concluded:

“Past performance is of no use in picking tomorrow’s winners or avoiding losers”.

Study 2

A study by Quigley and Sinquefield (1998) focused their research on whether past performance is a good predictor of the future. They took monthly returns on all UK equity unit trusts that were in existence at any time over the period 1978-97. The authors formed equal-weighted portfolios of funds based on their performance ranking, by decile, over an initial year. The performance of each portfolio over the following year was then examined.

The authors found that, as an investment strategy, reforming one’s portfolio each year with last year’s top 10% of funds would not produce higher returns than a simple buy and hold strategy. They found that low decile portfolios were found to have persistently poor subsequent annual performance.  

	Understand your attitude to risk
	Build a well-diversified, low-cost, asset class portfolio, using index and passive funds
	Accept the market rates of return and steer clear of actively managed funds