Past Imperfect? The Performance of UK Equity Managed Funds

Abstract

This paper presents evidence on whether information on the past investment performance of unit trusts can be useful to retail investors. The conclusions are important for investors who may be unsure of the value of information on past investment performance when choosing a fund. The issue is also important to the FSA in considering what information to publish in its comparative information tables. A number of researchers have examined whether past investment performance repeats. The conclusion from an examination of this literature is that repeat performance (if there is any) is both small in the size of effect and short lived. Repeat performance (persistency)is most evident for smaller poorly performing funds but the degree of persistency remains low. The conclusion from studies of UK unit trusts, and the more reliable of US studies,is that retail investors could not usefully exploit information on past performance. Some of the literature suggests that persistency is even less evident for recent years. Evidence is provided on whether this may be true for funds in the largest four UK sectors. Both charts and descriptive statistics suggest insignificant persistency since London moved to a system of electronic trading. This is tested further by using a new measure of persistency. Relative to most other studies this new measure examines persistency over a longer time horizon. The approach has greater relevance to the practical choice faced by consumers. The results from using this new measure support earlier conclusions. There is no evidence it at investment performance persisted over recent years. To conclude, information on past investment performance would not,in general,be useful to retail investors. Findings from the literature and our own study do not commend the inclusion of information on past performance in the FSA's comparative information tables.