Chasing return performance is clearly a losing strategy, It provides the opportunity to buy high and sell low. Virtually all of the mutual fund recommendations published in the press analyze historical returns. The better recommendations speak to longer time horizons for the analysis and add factors like fund manager tenure.
Mutual funds do exist that exhibit mutual fund persistence, beating the S&P 500 in terms of both risk and return. Many actively managed mutual funds have accomplished this. How to identify them?
There is a very good conceptual rationale for positing that past performance can identify funds likely to outperform in the future. Actively managed mutual funds are decision-making machines. Their decision-making capability is the bottom line result of people, processes, approaches, and tools that they use every day to make decisions. Good machines are more likely to make good decisions than bad machines. This capability to make consistently good decisions can be inferred from past risk, return and persistence behavior. Persistence is the tendency of a fund to exceed S&P500 return at lower than S&P500 risk. A tool that provides this analysis is available at www.FundReveal.com and a free trial is available.
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Tony DuBon of MA 4:11PM November 08, 2010