We've known for a long time about the evidence that good past performance doesn’t persist; think of the FSA’s disclosure statement, Past performance is not a guide to the future. But what about other indicators? Surely the independent ratings agencies should be able to give us some idea?
A number of years ago I started recording some of these independent ratings, which take into account a whole range of objective and subjective criteria. Just for fun, I pulled these out from May 2010 to see how the ratings have done in predicting future performance.
The short answer is, Not very well.
If an investor or adviser selected a fund based on the ratings, the chances of it doing well over the next three years turns out to be pretty much random.*
There is no denying that some fund managers do better than others. The difficulty is in predicting which ones to pick.
There is a better way…
David Crozier CFP
*Source of data: Financial Express Analytics. Data: UK All Companies sector between May 2010 and April 2013. Correlation between Financial Express Crown rating and quartile ranking of 3 year cumulative performance was 0.133.