The Dangers of Chasing Recent Performance

Capital Guardian, parent company of American Funds, recently cited several studies supporting their view that historical investment performance alone is not an effective basis for selecting or rejecting investment managers. One study, conducted by Cambridge Associates, evaluated 92 retirement plans that removed 652 funds and added 907 funds between 1996 and 2001. The products that were replaced due to poor short-term results had lagged their respective benchmarks by 1.7% over the three-year period prior to their replacement.  However, those same funds ended up outpacing their benchmarks by 6.6% over the three-year period after being replaced.

Even the best long-term funds can lag over several-year periods. Successful analysis of investment products i to be based largely on qualitative factors, including an evaluation of the portfolio and research management teams, consistency of their style and process, and the quality of the organization.  

Click here for American Fund's two-page report, "Can emphasis on short-term results generate best-in-class fund lineups?"  

Scott Middleton