Most funds fail to retain top quartile over five years

Funds that were top quartile five years ago are more likely to be bottom quartile now than to have retained that status, according to research by Money Management.

Analysis of data from Morningstar shows that, of 355 that were top quartile in their own sectors in July 2008, only 76 retained the accolade five years later.

At around 20 per cent the total, the number is fewer than would be expected by the laws of averages if no external factors were taken into account.

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Further analysis of the data shows that 89 of the top quartile funds from five years ago were bottom quartile this July. A further 19 were liquidated.

The data, which accompanies an analysis of the psychology of fund selection, highlights that investors should not use past performance as a guide to the future; despite knowing this fact, many investors continue to do so.

“I would suggest that what you’re not looking for are the people who are number one or in the bottom decile,” says Ian Porter, head of wealth management at Sanlam Private Investments. “What you want are the performers who produce steady returns over, say, 10 years.”

The research is backed up by a similar survey performed by Standard & Poor’s in December 2012. It found that of 707 US mutual funds, of those ranked in the top quartile in September 2010, just 10 per cent were still in the top quartile two years later.