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Inside Edge – Ian Chimes

Popstars The Rivals will be top of the pops at Christmas. Past performance is quite useful in the fund selection process.

Some facts are so blindingly obvious that you really wonder why people bother to question them in the first place.

The recent report by Charles River Associates concludes that a fund in the top quartile over the past 12 months has an approximate 33 per cent chance of still being there 12 months later. This study has looked at 21 years of data. There are lots of other interesting persistency ratios.

The report was commissioned by the Investment Management Association in order to offer a robust defence to the FSA on the subject of whether investors should be encouraged to look at past performance at all.

Interestingly, this report comes out at a time when intermediaries are steadily getting through gallons of Tippex in their reports as they replace the names of departing fund managers with new recruits and introduce new pages in their address books for the upcoming new fund management companies.

There has never been a time of so much fund manager change as new boutiques are set up and larger organisations lose their star managers.

This begs the question of how valid these three-year numbers are. A fund that is top quartile one year and then fails to be there the following year is not necessarily run by the same manager two years in a row – let alone three years in a row.

The deterioration in the performance could have been caused by fund manager style moving out of favour, a high-risk strategy going wrong, a key member of the team departing, making an incorrect strategic bet or maybe having a specific stock nightmare.

The IMA should, however, be applauded for this fight back in trying to make the point to the FSA that past performance does have some relevance to investors in choosing funds.

Without some resistance we will all find ourselves not being able to refer to past performance at all. Recommending a particular fund then becomes more of a battle between the marketing departments.

All fund providers will claim to be a combination of big, very big, niche, solid, dependable, adventurous and sexy. And all this will be accompanied by a picture of a chaffinch, a wombat or a gyroscope to illustrate these concepts.

I cannot help feeling however that an opportunity has been missed here. The best research, analysis and endorsement of active management is published regularly by Citywire.

Its output clearly shows that good active managers with individual track records are worth backing.

These managers outperform regularly and the higher than tracker fees are worth paying.

We are all aware of who the well known manager are and every month Citywire introduces us to others who we do not yet know but should research. It is compulsive reading.

How about the IMA having a word with those very smart people at Citywire? The IMA could use this data to support the argument that persistency of performance exists. They could then go one stage further and demonstrate why it exists. The answer of course is that the good managers persistently outperform – game, set and match.

The risk of the IMA relying on the CRA findings is that the results are not statistically that much better than random. They are encouraging but not a knockout blow.

The industry needs to make the point crystal clear: – persistency exists but not because a fund has a three-year track record. It is the identity of the manager of that fund that matters.

The findings of the CRA review are a worthy statistical help but the FSA will need some more convincing. The data exists. Let us hope that they get to see it.

Ian Chimes is Managing Director of Credit Suisse Asset Management Funds (UK)


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