consultants often used by fsa back active manager claims against the regulator
The IMA believes it has statistical proof that past performance is a guide to the future and of use to retail investors.
Investment Week has obtained a draft copy of the Charles River Associates report done on behalf of the IMA, which is due to be released later this autumn. It is the second report commissioned by the IMA examining the issue of past performance.
The consultants, often used by the FSA itself, have concluded the FSA's argument that performance should have little relevance in investment decisions is unsustainable.
Using Standard & Poor's figures, augmented by data from other sources, Charles River Associates examined funds in the UK All Companies, UK Smaller Companies, UK Equity Income and UK Equity & Bond sectors.
The group's calculations, on a net and gross basis, take into account funds that have closed down, and shows well above average persistence of top quartile performance.
Covering data for the four sectors from 1981 to 2001, the study included 508 funds available at the end of the period as well as 434 funds that were closed during that time. Tracker funds, which were first marketed in 1988, were not included.
If returns were random, only 25% of funds in the top quartile over one year would be expected to remain in the top quartile in the subsequent year. The actual percentage for the UK All Companies sector during the period 1981-2001 is 37%, calculated on gross returns. In the UK Smaller Companies sector it is 39%, while in UK equity income it is 32% and in UK Equity & Bond 35%. When calculated on net returns, those percentages actually rose, Charles River Associates found.
Charles River said if charges are factored in, the tendency of bottom-quartile funds to underperform is strengthened. It argued this is because these funds are more likely to close, so investors will incur a new set of initial charges when they have to switch to another fund to retain their sector exposure. The consultants made this assumption in the calculations net of charges.
According to the study, a fund in the top quartile of the smaller companies sector, based on the previous 12-month investment period gives an average return in the next 12 months of 15.5% net of charges, using data from the 21-year period 1981-2001. This figure falls to less than 10% if one picked a fund in the bottom quartile based on the previous 12 months' performance.
By choosing a fund in the top, rather than the bottom, quartile, based on its previous 60-month performance and holding it for the following 60 months, produces a higher return in three out of four sectors, the report stated. UK Smaller Companies produces a return about 12% higher than the fourth quartile equivalent, UK Equity Income about 16%, UK Equity & Bond shows no difference in the return while the UK All Companies is around 4% higher.
The report did not study why persistency exists, just if it does.
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