Investors warned of chasing performance perils

The risks of chasing fund manager performance have been highlighted by a new study that top-performing retail share funds one year invariably have lacklustre performance the next.

The study, released by research houseMorningstarand commissioned byVanguard Investments Australia, shows that only 16 per cent of funds among the top five performers in one year duplicated this the year after.

The study analysed the five top-performing retail Australian share funds each year from 1994 through to 2003, and compared each year’s performance with the subsequent 12 month period.

The study found the top five funds in a given year produced a return 15 per cent lower the following year, and that while top-performing funds outperformed the S&P/ASX300 Accumulation Index by 16.6 per cent on average in the year they came out on top, they only marginally beat the index the next year by 0.3 per cent.

Around half of each previous year’s top performers failed to match the index the year after, some by large margins, and those funds that survived through to the present only managed to exceed the benchmark by 1.1 per cent per annum over the period.

Morningstar head of consulting Anthony Serhan says the study clearly shows the risks associated with the ‘chasing returns’ phenomenon.

“It shows the dangers of investing purely on the basis of which funds came out on top of performance league tables for the previous year,” Serhan says.

The relationship between risk and return was also evident in the results of the study, with many funds topping the performance tables one year and footing the table in other years.

The study also showed that 21 per cent of the retail share funds analysed over the last 10 years had been shut down by 2003, and that 21 per cent of those also featuring in the top five were no longer being offered.