The FSA should review its position on past performance and its impact on investment decisions, says ...
The FSA should review its position on past performance and its impact on investment decisions, says the Association of Unit Trusts and Investment Funds, as a new study shows past performance, whether good or bad, can at least be persistent.
Commissioned by AUTIF, Fidelity International, Standard Life Investments, and Skandia Multifunds, research published today challenges the notion that consumers should not look at past performance when taking investment decisions by suggesting that consumers can actually make profitable use of past performance information.
Economic consultant Charles River Associates (CRA) reviewed a variety of academic literature to discover that not only can consumers use such information to their information, but withholding past performance data is in fact detrimental to consumers.
CRA's principal conclusion - that there is considerable academic research suggesting that persistence in performance does exist - challenges the position taken by the FSA in drawing up its comparative tables, says AUTIF.
"This study, the most comprehensive of its kind, demonstrates conclusively that taking investment decisions without access to past performance data is unwise.," says Richard Suanders, director general at AUTIF.
"We must conclude that the FSA's decision to exclude this information from its comparative tables was a mistake which is detrimental to consumers.
"We believe the FSA should now reconsider this decision. The inclusion within the tables of past fund performance data, in a standard format, as recommended by the FSA's own Task Force, should be implemented as soon as possible."
There is, for example, overwhelming evidence that poor performance persists, says the report, because without performance information, consumers might invest in poorly performing funds, and management incentives to perform well could be reduced.
There is strong empirical evidence that losing mutual funds repeat. Thus divesting one's losing funds would enhance investor returns," says the CRA study.
In particular, the CRA examined in detail the work done for the FSA by Bacon & Woodrow in 1999 and the FSA's own Occasional Paper "Past Imperfect? The performance of UK equity managed funds" (OP9), written by Mark Rhodes and published in 2000.
The CRA now questions both the methodology and approach of both these projects, demonstrating "their failure to take full account of the available literature, including significant misrepresentation of the conclusions of work by US academic Mark Carhart".
The CRA also claims the FSA's OP9 paper overlooked two-thirds of published research in the US, including some of the most recent and rigorous work.
"Past fund performance is never a guarantee of future performance, but in recent years, government and regulatory policy has been driven by the assumption that there is no relation between the two," adds Saunders.
"The work we are publishing today decisively shows that view to be outside the consensus of academic research. The significance of this for consumers is that profitable investment strategies can be developed using past performance as one parameter. Past performance should never be the only criterion, but it has a clear role to play.
"The paper also highlights the relative lack of robust research on the UK market, as compared with the US. The second stage will therefore be a detailed study of performance persistency the UK, with particular reference to the value of information to consumers," he continues.
A second CRA report is being published later in the year which will provide a full statistical and economic analysis of how consumers can use information about performance persistence.
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