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High flying funds fall to earth: Charts of the week

Lewis Jackson  |  12 Jul 2021Text size  Decrease  Increase  |  
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In a year where no funds in the Morningstar coverage universe posted negative returns, many fund managers will be touting their performance to investors.

How much attention should investors pay to the funds which top performance league tables? In this week’s Charts I look at what happens to the performance of winning funds in the years after they take the top spot.

I take the top performing equity funds for each year between 2006 and 2018 – thirteen in total - and look at how they subsequently:

Perform against other funds in their category
Perform against their benchmark
Perform against their best year’s performance

The funds are drawn from the 1762 Australian-domiciles equity funds in the Morningstar database. 

Versus their category

Most of the funds that topped the league tables spent time at the bottom later. A little over one in four of the years following a winning performance are spent in the bottom 20th percentile of their category.

Vanguard Global Infrastructure was the best performing equity fund in 2008. After that, it was in the top 50 per cent of funds in its category for 5 of the 12 years between 2009 and 2020.

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But for 7 of those 12 years it was in the bottom half of its category. Of those seven it was in the worst percentile 3 times.

Versus their benchmark

A firm can be beaten by its peers but still provide investors returns above the benchmark. Unfortunately, the 13 winning funds spend, on average, half of their subsequent years underperforming their benchmark.

Fudician Indian was the best performing fund for 2014. But it performed below its benchmark for 5 of the 6 subsequent years to 2020.

Some winners were more successful, such as SmallCo Investment going on to beat their index 75 per cent of subsequent years. 

Neither fund is covered by Morningstar.

Versus their own performance

Picking funds based on their best year’s performance hoping for a repeat is likely to disappoint. The average performance for the years following a winning performance are considerably lower.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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