Do Past Mutual Fund Winners Repeat?

Anyone, from a second grader to a 401(k) consultant can pick the best performing funds for the past 1, 3, 5, and 10 years. The problem is no one can pick which funds will perform the best 10 years from now. We cannot predict the future. The phrase “past performance is not an indicator of future outcomes” is a common fine print line found in all mutual fund literature. Yet due to either force of habit or conviction, both investors and advisors consider past performance and related metrics to be important factors in fund selection (which is not a valid consideration).

So, just for fun let's look at the S&P Persistence Scorecard. "The semi-annual S&P Persistence Scorecard seeks to track the consistency of top performers over three- and five-consecutive year periods, and measure performance persistence through transition matrices for three- and five-year non-overlapping holding periods."

The results:

Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a top quartile ranking over the same period.

Based on this data and extrapolation, if we picked a top-half ranked large-cap fund, today, we could be strongly confident five years from now that the same fund will have roughly a 4.27% chance of being in the top-half of performers and roughly a 0% chance of being in the top quartile. Odds that I would not like to place my investment savings in.