Investors are warned against chasing past performance, but new analysis shows that it has been a successful strategy over the past decade.
- Performance chasing’ has generated a return of 173.6% over the past decade
- ‘Bargain hunting’ has generated just 42% over the same period
- The success of the technology sector has distorted returns
As the FCA is fond of reminding investors, past performance is no guide to future performance. However, troublesome new analysis from AJ Bell shows that it might be. It has found that over the past 10 years, chasing fund performance has yielded great results.
Investors that put their money into the best-performing fund sector of the previous year would have generated a return of 173.6% over the past decade. £10,000 would now be worth £27,360. Those investors who had done the sensible thing, and invested in a global equity fund would have produced just £24,184 over the same period.
Bargain-hunters would have fared far worse. Investors who put their capital into the worst performing fund sector of the previous would have generated a dismal 42% return over 10 years. A J Bell also looked at ‘egg spreaders’, ‘herd investors’ and ‘contrarians’ – no-one fared nearly as well as performance chasers.
This begs the question of whether this is a strategy for the long-term. Here, the answer appears to be an emphatic ‘no’. The past decade was unique, with low interest rates favouring a handful of growth stocks. The bargain hunters would have been looking mostly at value stocks, but for the past three years, they would have been looking at China. No wonder they have done badly.
Equally, AJ Bell points out, the figures are notably skewed by the performance of the technology sector: “In both 2020 and 2021 technology performed so well that those two years account for two thirds of the returns experienced by the performance chasing strategy in our analysis. The technology fund sector returned a whopping 44.4% return in 2020 and followed this up with a 17.7% return in 2021.” This was the key reason performance chasing did so well, but also why it may not be repeated.
Performance chasing has been a poor strategy in previous decades. Then again, so has bargain hunting. Both strategies lead investors to the extremes of the stock market – technology, India, China, commodities – which can create significant volatility. AJ Bell points out that holding a global equity fund may have been less exciting, but it would have been a far smoother ride and is also likely to be a more effective strategy in future.
While performance chasing may have worked in the past, it unlikely to be a guide to the future from here. In this case, investors may need to heed the FCA warnings and take a more sensible approach.
