a financial adviser will never sit down
with you and show you a list of funds
that have performed poorly that's not
likely to lead to a sale this simple
truth leads to a much larger issue that
affects the choices that investors make
in 2006 there were 90 Canadian equity
mutual funds in Canada at the end of the
decade ending December 2016 only 38 of
those funds or 42% of them still existed
when funds post poor performance they
stopped attracting new assets and
eventually they closed down when the
fund closes down its performance history
goes with it this is a big problem for
the average investor trying to select an
investment at any given time it looks
like a lot of mutual funds have been
doing really well and they have you're
just not saying the ones who have been
doing poorly this is called survivorship
bias you only see the funds that have
survived so the whole picture looks
rosier than it should the problem for
investors is that an active manager
posting strong performance numbers even
over long periods of time does nothing
to indicate their ability to perform
well in the future I'm Ben Felix
associate portfolio manager at PWL
capital in this episode of common sense
investing I'm going to tell you why past
performance is one of the worst
predictors of future results
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when an actively managed fund is able to
post strong enough performance to
survive it may be an indication of a
truly skilled manager but it's far more
likely to be luck mark our hearts 1997
paper on persistence and mutual fund
performance published in the Journal of
Finance looked at 1890 to u.s. mutual
funds between 1962 and 1993 the paper
concluded that there was no evidence in
the data of skilled or informed mutual
fund portfolio managers in other words
the funds that performed well did so by
chance a 2009 paper by Eugene fama and
Ken French titled luck versus skill in
the cross section of mutual fund returns
similarly found in a sample of 3156 the
u.s. mutual funds between 1984 and 2006
the few funds demonstrated sufficient
skill to cover their costs in a real
world example a 15 year sample of u.s.
mutual funds ending in December 2015
shows that winning funds are no more
likely to continue winning of 2758 fund
that existed the beginning of 2001 only
541 or 20% of them have performed
through the end of 2010 the next five
years didn't go well for most of those
out performers of the 541 winners only
200 or 37% of them went on to perform
through the end of 2015 could you have
picked the skill managers that I
performed through the whole 15 year
period according to the evidence your
chances are pretty slim some funds are
able to produce very impressive
long-term track records but that does
not make him safe bets for investors in
the 1970s David Baker managed the 44
Wall Street fund to market beating
performance for ten straight years the
following decade it was the single worst
performing fund in its category dropping
significantly while the S&P 500 gained
even more impressive is a linear large
debt fund which beat the S&P 500 for the
11 years ending in 1984
well this market beating performance no
doubt attracted attention and assets the
fund spent the following 18 years being
decimated by the S&P 500 if 11 years
wasn't enough to weed out the lucky
managers bill Miller's Legg Mason valued
Trust Fund beat the S&P 500 for the 15
years ending in 2005 it suffered
miserably against the index for the next
7 years before being taken over by a new
manager in 2012 most impressive of all
is the tiger fund a hedge fund formed in
1980 it spent 18 years averaging returns
over 30% per year and its assets had
grown to 22 billion by 1998 over the
following two years the fund faltered
losing 10 billion of assets and closing
its doors in 2000 the odds of
outperformance are slim but some active
managers do beat the market the
challenge for investors is identifying
winning managers before they win and not
before they start to lose a financial
advisor who's motivated to sell a
product can easily identify a list of
funds with great track records but there
is no evidence to show that those funds
will continue to perform well in the
future
join me in my next video as I explore
what it takes for someone to call
themselves a financial advisor my name
is Ben Felix of PWL capital and this is
common sense investing I'll be talking
about this and many other common sense
investing topics in this series so
subscribe click the bell for updates I'd
also love to hear your suggestions for
future topics
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