Where financial advisers and fund managers quote figures for the past performance of an investment fund they are required to warn potential investors that “past performance is not necessarily a guide to the future”, or some similar wording.

However, many investors continue to believe that fund or funds that have performed very badly over recent years might be expected to continue to do so for the foreseeable future. The choice, in these circumstances, is whether to remain with the existing funds in the hope that ‘their time will come’ or to cut and run and seek better potential elsewhere.

Other investors ignore the ‘past performance risk warning’ and eagerly subscribe to funds which claim leading investment performance over the last, say, three or five years. These people clearly believe there is a higher chance of success with a fund (or fund manager?) with a proven past record of success.       

So, what is the truth behind the relevance or otherwise of investment past performance to the chance of continued success into the future?

Over the last few years there have been a number of leading reports commissioned to provide an answer to this question. Both the Investment Managers Association (IMA) and the Financial Services Authority (FSA) reports agreed – albeit to differing degrees – that past performance may indeed be a factor indicating future performance. This finding is most relevant with poor performing funds in one year: these are statistically more likely (though by no means certain) to perform badly in the next year and (to a much lesser extent) beyond.

This consideration is therefore one of the factors taken into account in investment and portfolio advice from The Pensions Office. But it is not a major factor, except as regards investments in one of many poor performing With Profits funds.

So, which funds are hot, and which are not?………….