Does Historical Performance Predict Future Performance?

Mar 1, 1995

Which mutual funds will be next year's winners? Conventional wisdom in the investment community says that to predict future performance, look at past performance. But does it help to know last year's? Do winners repeat? The idea that winners repeat is so obvious and popular, it has spawned an entire mini-industry devoted to documenting past winners. Mutual fund performance reviews regularly appear in publications like Barron's, Business Week, and Consumer Reports.  Services such as Morningstar and Lipper exist to publish mutual fund rankings.  Pension plan consultants closely examine past performance before recommending managers, and successful managers proudly document their past performance. All this suggests that everyone choosing active managers, from pension plan sponsors to  individual investors, thinks past performance predicts future performance. Is this true?  In this article, we will review past investigations into this question, and then present new results looking at performance of active equity and fixed income managers over the past decade. (1)