You will have often seen, in investment adverts, that “past performance is not necessarily a guide to the future”, or similar wording.

This warning message was imposed on investment advertising and marketing a number of years ago in response to some investment houses hard-selling funds which had performed well over recent months whilst putting lesser-performing funds on the back burner.

It was noticeable when the well-advertised top-performing funds fell in value some investment houses started to market one of their other funds which happened to be prospering at the time. And so on.

So, some commentators warned investors against funds with attractive past performance on the basis that, perhaps, they had already missed the good times and could be expected to suffer as the fund might now, or soon, “run out of steam”.

Other commentators suggested that, surely, the best investment managers to trust for the future would be those who had already proved their worth by delivering above-average performance in the past.

To cut a very long story very short, the Investment Managers Association (IMA) and the Financial Services Authority (FSA) commissioned independent surveys and reports on the importance, or otherwise, of past performance as an indicator of likely future performance. Both of these reports showed that funds which displayed above-average performance in one year were statistically more likely to produce above-average performance in the following year, relative to their sector.

Perhaps more importantly, the reports also showed this bias was more pronounced with poor-performing funds: these showed an even greater likelihood of poor performance in the following year and indeed years.

So, whilst there is no doubt that past performance is not a definitive indicator of future performance, it is certainly a factor which is worthy of consideration.

How do your existing funds compare to the best……or worst……?