WILMINGTON, Del. - A new study by Smith Barney Consulting Group confirmed what everyone has always suspected: top investment performance is not a guarantee of future performance.
In fact, the top performing managers were more likely to drop to the bottom of performance comparisons in later periods than to repeat their successful performance, according to the study.
While the returns of the top managers plunged in the period after a strong performance run, the returns of bottom-quintile managers tended to rise remarkably in the next period. The result: the poorer-performing managers tended to outperform the top-quintile managers of the previous time period.
After a survey of more than 3,300 mutual fund investors conducted by Columbia University's Graduate School of Business found investors thought past investment performance was the most important selection criteria for a fund, Smith Barney decided to challenge that.
The Consulting Group's study included 72 equity managers with at least 10 years of performance data through Dec. 31, 1996. The managers' styles ranged across all equity asset classes.
In terms of one-year returns, there were only six instances when a manager placed in the top-quintile three years in a row. Only one manager placed in the top quintile four years in a row.
For all time periods analyzed, an investment manager was far more likely to drop from the top quartile in the following period than to stay near the top. Only 15 managers placed in the top quartile for two successive two-year periods.
Smith Barney's study found investment style-related correlations were responsible for a manager's presence in the top or bottom quartile, a result that probably doesn't surprise anyone in the mutual fund industry.
For example, during the three-year period from 1989 to 1991, 11 of the 14 managers in the top quartile were growth stock managers. Seven of the 14 managers in the bottom quintile during this time were value managers. The Russell 1000 Growth Stock Index returned an average of 24.2% annually during the period compared to a 12.8% return for the Russell 1000 Value Index.