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Survey finds fund past performance is a key indicator

Past performance is a key indicator when choosing which funds are more likely to enjoy top-quartile performance in the future, according to a report commissioned by the Investment Management Association.

Ima claims the study by consultant Charles River Associates is the most comprehensive ever undertaken. It monitored 940 funds from four UK equity sectors – all companies, equity income, smaller companies and equity & bond – over 21 years.

It found that a fund with a top-quartile pedigree had a better than 25 per cent chance of future top-quartile performance while a bottom-quartile fund had more than a 25 per cent chance of poor future performance.

In the UK equity income sector, a top-quartile fund had a 33.5 per cent probability of remaining in the top quartile over three years after initial and annual charges were deducted. This probability increased to more than 40 per cent if held for more than seven years.

Ima says the research not only demonstrates a link between past and future performance but also increases the need for the FSA to introduce a standardised format for presentation of past performance data in marketing material.

Chief executive Richard Saunders says: “These numbers do not show that picking last year&#39s winner guarantees outperformance next year. But it suggests that, on average, past performance relative to peer group has a tendency to carry forward into the future for both strong and weak performance.”

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