How Much Should You Care About Past Performance? Our Experts Weigh In (Part 2)

Past returns can be useful in assessing the effectiveness of a fund manager or strategy, but they must be put in context, according to Morningstar experts.

Adam Zoll 23.08.2013
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Continue with our Morningstar experts‘ opinions on “how to use fund performance data”. You can read the first part of the article here.

Sam Lee, ETF strategist and editor of Morningstar ETFInvestor
Past performance is by itself a mostly useless and potentially harmful measure by which to judge a strategy. First, it's sensitive to the start and end dates at which you look. Second, the periods during which performance data are available are often too small to be meaningful. A strategy with a great three- or five- or even 10-year record is likely not going to continue to outperform in a meaningful way (otherwise picking a winning strategy and making lots of money would be easy). If you're going by performance alone, you often need decades of performance data to come to a statistically meaningful conclusion, and that's assuming the process generating those returns doesn't fundamentally change. Finally, strong historical performance in an asset class or strategy often suggests the asset is expensive or the strategy is crowded and should therefore be avoided.

The real value in using past returnsis to supplement, not dominate, a holistic assessment of a strategy or asset because a good strategy or asset can experience years of bad returns, and a bad one can experience years of good returns. Past performance rarely provides enough information to strongly affirm or disconfirm a strategy's merits. When it does, it's usually to disconfirm. (Poorly performing active managers tend to experience persistent underperformance.)

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Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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