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Autif needs to polish its performance

Autif has dragged the topic of past performance back to the top of the agenda.

Proudly wielding its 32-page report, compiled by Charles River Associates, it condemned the FSA&#39s decision to exclude performance data from its comparative tables and dec- lared it had evidence to prove that performance is indeed relevant.

But as the hype subsi-ded and the industry took the time to study Autif&#39s work, some doubts began to be expressed.

The paper, funded by Fidelity, Skandia and Standard Life, and entitled, Performance persistence in UK equity funds, comprised a review of past research, most of which was specific to the US.

While such a comprehensive review of literature had not been carried out before, the report&#39s critics suggested that it did not really bring anything new to the debate.

The CRA report paid much attention to the Mark Rhodes&#39 study, Past Imperfect, the document which the FSA used to shape its stance on past performance.

Published in August 2000, Rhodes concluded: “There is a large, and growing, body of research both here and in the US which demonstrates that information on past investment performance would not, in general, be useful to retail investors.

“A number of researchers have examined whether past performance repeats. The evidence is that repeat performance, where there is any, is small and short-lived, and is most likely to occur in smaller, poorly performing fund.

“In practical terms, this means that investors would not find it useful to examine funds&#39 past performance in making investment decisions. It also supports the FSA&#39s indication that its comparative information tables should not include details of past performance.”

CRA criticised Rhodes for not making full use of the available literature and asserted that he had misrepresented the work of US academic Mark Carhart. Rhodes quotes page 81 of Carhart&#39s 1997 paper on US equity funds:

“While the popular press will no doubt continue to glamorise the best-performing mutual fund managers, the mundane explanations of strategy and investment costs predictability account for almost all their mutual fund returns.”

However, CRA points out that this quote was out of context and that in only the previous paragraph Carhart had stressed that one of the rules for maximising wealth was to avoid funds with persistent poor performance.

In turn, CRA and Autif go on to conclude that past performance is of use to the consumer, particularly in the case of eliminating poorly performing funds.

Virgin Direct, an Autif member, also waded in against the trade body. The FSA&#39s answer to the criticisms against Rhodes&#39 alleged misrepresentation of Carhart. The FSA highlighted that Rhodes appreciated the existence of persistency within poor-performing funds.

However, Rhodes&#39 final decision was to dismiss these findings: “These poorly performing funds are small and represent only a tiny fraction of the market. So in practice the value of information on past performance may be limited.”

Virgin Direct marketing manager Gordon Maw says: “I do not think it helps the debate to select a few reports and say that they make a conclusive case. If you look at the UK reports, four say that performance does not repeat and four say it does. If anything, that proves the jury is out.

“The research we carried out shows that there is persistency of performance in the UK but it only lasts for about three years – there are cycles but they fall away. I think this is the FSA&#39s worry. As a fund manager, we do not not want people to have access to past performance. Let us have this debate but try and raise the level a bit.”

Virgin also took exception to the fact that the report was carried out with three Autif members, saying it is not fair to call it a representation of “the views of all the trade body&#39s members.”

The FSA also says that since the Rhodes report, the past performance debate has moved on a little. The regulator&#39s past performance taskforce, which reported in October, decided that past performance should not be banned from advertising.

The FSA conceded it may need to rethink its decision to keep performance statistics off the comparative table but would need to “arrive at a single, standardised and objective measurement of past performance”.

Autif&#39s intentions are clearly admirable but it may need more than research on previous research to clinch the argument.

As Autif admits, there has been a lack of UK-specific research carried out on the use of past performance, and it is perhaps this that needs to be addressed.

CRA is now set to carry out its own statistical research, which will hopefully produce answers to all of the FSA&#39s doubts.

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