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Is it all over for past performance?

Does past performance have a role to play in decision-making? In August, the FSA produced a paper in its occasional series entitled, Past Imperfect? The performance of UK equity managed funds.

The paper was timed to coincide with the debate over the use of past performance in advertising and in league tables.

It has long been an industry standard “wealth warning” that past performance is not a guide to future returns. So the role of the financial intermediary has been key in providing the investor with further information prior to investing in a fund.

But many intermediaries have recommended independent multi-manager portfolio businesses as a successful solutionto the problem.

As part of our multi-manager fund selection process we conduct regular surveys into the inconsistency of investment returns, as one way to identify funds that merit further research. These consistency filters focus on the last three 12-month periods and are carried out on a monthly basis.

We screened 716 funds, of which only 24 have delivered top-quartile returns in each of the last three 12 months to the end of June 2000. That is equal to just 3 per cent.

Past performance clearly has little value in isolation but I think the FSA is misguided in its analysis of thereasons for this.

Fund industry figures have already drawn out some of the inconsistencies and flawed conclusions. Perhaps most surprising was the conclusion that the lack of persistency in returns had increased “since London moved to a system of electronic trading”.

The numbers do suggest there is something going on behind the scenes but I think it is rather more than electronic trading. Corporate activity in the last year has affected, or is currently affecting, over 20 different fund management groups. Recently, Chase Fleming and JP Morgan, Aberdeen and Foreign & Colonial have all been drawn into the short-term uncertainty that such situationspresent and we can be sure that at the very least headhunters will be calling.

It is no surprise then that around 14 per cent of all funds saw a change in fund manager in 1999, rising to over 60 per cent in the past three years. Our analysis also shows that less than one-fifth of all funds have a five-year record with the same manager (down from one-third in 1998). In addition, only 38.5 per cent of all funds have a three-year record and an estimated 260 funds have changed manager in 1999 alone. On top of this, there were 217 new unit trusts and Oeics launched in 1999 (up from 121 in 1998), increasing the number of funds available by 13 per cent.

Is it any wonder that consistency is rare – the majority of track records of three years or more belong to somebody other than the incumbentmanager and must therefore be less useful.

In addition to this, the past three years have seen the performance baton passed from trackers and index-aware managers back to active managers. Market volatility has increased and new correlations have been formed between previously independent sectors such as technology and media. There are clearly many issues that will affect all but the most pragmatic manager over shorter periods.

Change is ever present in the companies and funds within the industry, and in the markets themselves. Past imperfect? Yes. Performance on its own is statistically insignificant asa tool for predicting. This is already well known and investors are warned accordingly.

Useless to retail investors? No. Past performance isinvaluable when interpreted correctly, using background knowledge of a fund, its manager, investment process, objective and history, and paying heed to the corporate issues that may or may not affect a fund and its manager.

The FSA is missing the point.

RobertBurdettDirector,Rothschild Asset Management


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