Morningstar Study: Long-term Outperformance Not Predictive of Future Outperformance

The AAII Journal reports on a recent Moringstar study that found no link between long-term performance and future performance. The study (which is available here), as AAII Journal reports, “looked at the returns of actively managed funds as of the end of 2014 to determine if there is any persistence in the mutual fund returns” by grouping funds “into one of five quintiles based on one-, two-, three-, four-, five-, and 10-year performance.” In five categories there was some statistically significant evidence that “funds whose returns ranked in the top quintile (20%) for their respective categories tended to beat their average peers over the following 12 months.” Beyond a year, however, “the link between outperformance . . . and future outperformance was found to be much weaker,” with the exception of some correlation to 10-year returns that was influenced by survivorship bias. AAII Journal notes the study also found “the price momentum of the underlying stocks had a statistically significant effect on performance over one-year periods across equal fund categories” and that, over the longer periods, “a preference for more volatile stocks had a significant, but small, impact on returns.” It also suggested that “over the long term, expenses matter, with low fees significantly increasing the odds of success.