Track Record Investing

“Most investors follow the crowd down the path to comfortable mediocrity,” says David Swensen in Pioneering Portfolio Management.1 Anxious to capture the gains that come with a winning mutual fund manager, manager pickers blindly chase a hot performing fund manager’s track record, failing to realize their odds for future success have vastly diminished.

Figure 5-1 shows the results of a study using Morningstar data reflecting the performance of active fund managers for the 13 years from 2004 to 2017. The chart depicts how on average, only about 9 funds remained in the top 100 the following year. 

Figure 5-1

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In the years 2008 and 2009, none of them repeated their previous year’s top 100 performance.

Variations in manager performance are a function of luck and the random rotation of the style of their fund. When a particular manager’s investment style is rewarded by the market, that manager is often credited with skill. As market conditions change, however, so does the performance of fund managers. Figures 5-2 and 5-3 track the rankings of the top 10 mutual fund managers in a given year and subsequent time periods. These charts reveal how quickly a “top” fund manager can slide to the bottom. For example, Figure 5-2 shows that the ProFunds Biotechnology UltraSector Inv had the highest performance out of 6,896 mutual funds in 2013. In 2014, however, the fund slipped to seventh place; then to 939 in 2015; 7,719th place in 2016 and finally landed in 393rd place in 2017. The data contained in these two figures reveal many other examples of fund performance that sharply declined in subsequent years.

Top-performing funds have failed to maintain their position throughout a meaningful subsequent period. As Bob Dylan famously said, “the first ones now will later be last, for the times they are a changing.”

Figure 5-2


Figure 5-3


Figure 5-4


Top-performing funds have failed to maintain their position throughout a meaningful subsequent period. As Bob Dylan famously said, “the first ones now will later be last, for the times they are a changing.”2

An analysis of the Morningstar database of 246 mutual funds with 10 years of returns is shown in Figure 5-4. The top graph shows the performance rankings of these 246 funds from best to worst (left to right) for the first 5-year period from 2008 to 2012. Then the same order of fund rankings is maintained in the bottom graph in order to see if fund performance was repeated in the second 5 year period from 2013 to 2017. In light of the above studies, it should come as no surprise that many of the managers who outperformed their peers in the first 5-year period did not do so in the second 5-year period, and vice versa.

Another tracking mechanism that can cause confusion is the reporting of mutual fund returns, often inflated when compared to actual long-term returns. The discrepancy arises from neglecting to account for funds that have closed or merged, resulting in the higher average returns of only surviving funds included in calculations. When funds go under, their records are stricken from databases, creating a survivorship bias. This bias inflates the remaining funds’ average returns by 21%, according to CRSP data cited by John Bogle.3 The 2017 year end SPIVA study states that 58% of actively managed domestic equity funds, 55% of actively managed global equity funds, and 48% of actively managed fixed income funds were either merged or liquidated during the previous 15 years.4

    -1 Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (New York: The Free Press, 2000).
    -2 Bob Dylan, The Times They Are a-Changin', song, Columbia Studios, 1964.
    -3 John C. Bogle, "The Arithmetic of 'All-In' Investment Expenses". Financial Analysts Journal, January/February 2014, pp 13-21.
    -4 Michael Rawson, "Survivorship Bias," Seeking Alpha, April 11, 2014
Step 5David SwensenMorningstarCenter for Research on Securities PricesCRSP