Chasing Returns

Intelligent, responsible investing is not terribly complicated, but it’s not as simple as many believe.

The undeniable fact is that most actively managed mutual funds fail to beat their respective benchmarks over any period.  This is true of funds tracking Canadian indexes and those of other countries as well.

Some investors seize on this data and conclude the key to a successful investing experience is buying those funds that have outperformed in the past.  The assumption is they will continue to do so in the future.

Before you decide to buy a fund with a great track record, consider this:  There’s a significant possibility your chosen fund won’t even survive for five years or more.  About 30% of Canadian mutual funds cease to exist, presumably due to less than stellar performance.

If your chosen fund is one of the survivors, with a record of beating its benchmark, how likely is it the fund manager will continue to generate market-beating returns?

An exhaustive study by Vanguard looked at the performance of 3,568 mutual funds for the ten years ended December 31, 2013.  It compared the results of buying funds with above average three-year returns with buying and holding any fund.

The buy and hold strategy was superior to a performance chasing strategy for every asset class. There’s an obvious lure to buying funds with a great track record.  But there’s a reason for this legal disclaimer:  Past performance is not necessarily indicative of future results.  Investors who avoid the thrill of the chase have been rewarded with higher returns.

At the Danielson Group, we don’t chase returns.  The evidence doesn’t support it.