The Mirage of Past Performance

David Swensen, long-time chief investment officer at Yale University, is one of the investment industry’s most outspoken critics – and we could not agree with him more.

In August, the New York Times published an opinion piece authored by Swensen (“The Mutual Fund Merry-Go-Round“) in which he railed against mutual fund companies, retail brokers and financial advisers who aggressively market funds awarded four and five stars by Morningstar. Swensen writes “The rating system merely identifies funds that performed well in the past; it provides no help in finding future winners. Nevertheless, investors respond to industry come-ons and load up on the most ‘stellar’ offerings.”

Swensen’s caution that past performance tells investors nothing about future performance is clearly demonstrated in the biannual Persistence Scorecard produced by Standard & Poor’s. The scorecard evaluates the consistency of top performers and concludes that the ability of actively managed funds to remain in the top-quartile, and even top-half, of performers over time has been below levels expected based solely on chance.

  • Of approximately 2,240 U.S. stock mutual funds in existence as of March 2008, only 3.0% achieved top-quartile results for the 12-months ending both March 2009 and March 2010. And over an additional 12 months (ending March 2011), the number of funds producing top-quartile results for three consecutive years was reduced to 24, or 1.1%.

  • Expanding the time horizon further dims the picture for consistent outperformance among active money managers. Of approximately 2,050 U.S. stock funds in existence as of March 2006, only 1.4% posted three consecutive annual periods of top-quartile performance; only two funds (0.1%) posted four periods; and none of the more than 2,000 funds were able to post top-quartile results for five consecutive 12-month periods.

  • Lowering the performance hurdle does little to improve the results: only 10.2% of funds placed in the top half of U.S. stock funds for three consecutive 12-month periods ending March 2009; only 2.6% over four years; and only 0.8% over five years. This outcome is even worse than the 3.1% rate over five years that would simply be expected by chance.

As prudent investors, what should we take from this data? First, the results are a clear indication of how intensely competitive the financial markets are – it’s nearly impossible for any professional stock-picker or market-timer to consistently outperform his or her peers. Two, the activity of attempting to identify the funds which will outperform is likely to be as fruitless as the underlying managers’ attempts to translate their forecasts into consistent outperformance.

Citing ill-advised performance-chasing and an industry with “a history of delivering inferior results to investors,” Swensen sums it up best in advising investors to eschew actively managed strategies in favor of “the long-term superiority of low-cost, tax-efficient index funds.”

The full S&P Persistence Scorecard can be found at

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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