BUSINESS

‘It did well last year’—how to lose money in mutual funds

CATHY GULLI March 5 2007
BUSINESS

‘It did well last year’—how to lose money in mutual funds

CATHY GULLI March 5 2007

‘It did well last year’—how to lose money in mutual funds

CATHY GULLI

The disclaimer on mutual fund ads that “past performance is no guarantee of future results” may be more than just legalese: a new study by Standard & Poor’s suggests that mutual funds almost never produce consistently good results. And if a fund is hot, be cautious because odds are it’s probably going to cool off before long, as S&P’s 2006 Mutual Fund Performance Persistence Scorecard shows.

Over the last five years, only three per cent of funds that invest in large companies, and 2.5 per cent of funds that invest in mid-size firms, maintained their place in the top quartile of the best performing funds; zero smallcap funds stayed on top during that same period. “These low counts are a sobering reminder about the validity of the often-footnoted disclaimer,” concludes S&P. “Past performance cannot be the sole or the most important criteria in fund selection.”

Suzane Abboud, president of FundScope Ltd., a research company in Richmond Hill, Ont., agrees and recommends other considerations. Such as: how volatile are the returns? How does the fund do in bad markets? And how high are the fees?

Those rare mutual funds that do consistently well tend to have two factors in common, according to the study: they have low expense ratios and are handled by managers with many years of experience.

But S&P warns that you shouldn’t go picking funds from among the worst performers, expecting them to rebound. The study shows that many of those in the bottom quartile tend to disappear altogether due to mergers or liquidations. The lesson then: bad fund managers rarely get a lot better, and funds on a hot streak almost never stay that way. If you’re still buying funds based on how they did in the past, you might as well just give your money away. M