SHORT HILLS, N.J. - The statement: "Past performance is not indicative of future results" is not 100% valid, according to a study by PDI Strategies, Short Hills.
PDI, a money manager, looked at 348 equity mutual funds with complete 10-year performance records as compiled by Morningstar Inc.
The funds were ranked by style into performance quartiles based on their average net annual return between 1985 and 1989. Then the same funds were ranked on performance over the subsequent five years.
The money manager's study departed from other research by explicitly controlling for investment style.
There were 32 repeating winners that were top quartile in both five-year periods and 32 repeating losers - "significantly more than might be encountered through random chance," according to the study. Middle-of-the-road performance also tended to persist - second- and third-quartile performers in the first five years seemed to cluster in the next five years.
Nevertheless, past performance is still a "rotten" predictor of future returns, according to the report. For example, 38 (almost half) of 1985-1989's top-quartile performers generated below-average returns in the subsequent five years.
However, there is a strong correlation between the level of expenses and performance.
Repeating losers had expenses that were, on average, more than double the expenses of repeating winners.
"Unfortunately, without further study, we can't determine whether a high expense ratio causes, or is the outcome of, poor performance. Massive redemptions stemming from dismal returns may force fixed costs to be distributed over fewer assets (i.e. bad performance causes higher expense ratios). Alternatively, high expenses could simply be a persistent drag on performance (i.e. high expenses cause bad performance)," according to the report.