many funds have basic consistency of return concludes study commissioned by Autif
Past performance does give a guide to the future, and withholding such information is detrimental to consumers, according to the group responsible for much of the FSA's research into polarisation.
In a study commissioned by Autif, Charles River Associates (CRA) concludes that previous research has shown that many funds have a basic persistency of returns, and past performance can help highlight this. It points out that this can be used not just to show up consistently strong performers but also help investors avoid consistently weak funds.
The conclusion contradicts the FSA's stance that there is no evidence that past performance repeats.
CRA has criticised the FSA's occasional paper, Past Imperfect? The performance of UK equity managed funds, written by Mark Rhodes and published in 2000.
Tim Giles, principal consultant at Charles River Associates, said the FSA has overlooked two-thirds of published research in the US, including some of the most recent and rigorous work. CRA's study of past research shows that of the eight recent UK studies into performance persistence, dating back to 1997, four conclude that persistency exists.
Of the 21 US studies of unit trust performance persistence dating back to 1970, 16 say persistency does exist, three say partial persistence is present and two conclude it is not.
The FSA's statement in Annex A of its comparative tables regarding the evidence on past performance reads: 'An enormous amount of evidence put together over 30 years shows past performance does not repeat.'
Giles said: 'This is clearly at odds with a balanced assessment of the literature. In particular, it completely ignores the significance of the widely reported persistence found in poorly performing funds. We find mixed evidence on whether positive performance of unit trusts repeats but strong evidence that poor performance persists.'
The problem with past research has been, said Giles, that few studies look at persistence from a consumer's perspective. Instead, they tend to focus on why persistency may occur, such as testing for the skill of a fund manager. The US studies have delved further into issues such as this and have separated them out from the overall study.
'We only need to determine if there is evidence of persistence in past performance and that retail consumers exploit this information,' said Giles. 'This would be sufficient to justify past performance figures as information that should be available to retail consumers.'
Persistence could result from a number of sources, such as stock selectivity, momentum or market timing. Many of the academic papers concentrate their attention on this issue according to Giles.
In looking at past research on this subject, CRA examined the treatment of risk, whether charges have been taken into account and whether the holding periods correspond to the behaviour of retail consumers.
Giles said: 'UK consumers should be interested in persistence, whether it is risk-adjusted or not, although the way they use this information might differ and previous research must be reviewed in this light.'
In order for any predictive power to be exploited, he added, it must lead to material benefits for consumers. Any persistency must not be offset by charges to the consumer, resulting in lower performance.
Autif has commissioned a second report from the group, to be published later this year. This will provide a statistically and economically robust analysis of how consumers can use information about performance persistence.
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