Common Portfolio Wisdom – A GOOD FUND = 5-STAR RATING
Rates management quality and consistency.
Can demonstrate how that fund could perform in a certain market.
If the market trend changes, the fund’s style and holdings may not perform well.
When referring to styles and holdings, past results are rarely good indicators of future results, as market trends tend to continually change.
For us football fans, July marks the start of training camps, the beginning of football season. If you are an avid fan, you have been paying attention to free agency, the draft, and trades all spring. (for those that are not football fans, stick with me anyway).
Have you ever been excited to acquire a new player in a trade or free agency that seems to be on the top of his game, unstoppable? You think he is just what you need to go all the way. Then, as the season progresses, your new star player looks nothing like he did for his past team. He is slower, always a step behind and hasn’t made the impact you expected.
This happened with Jimmy Graham; he was amazing when he played in New Orleans and then only average with Seatle and Green Bay. His “star” ranking was high, but that did not indicate future success.
The same is true when it comes to picking funds, the highest ranked funds means they have had great results in the past, but it does not tell you how they will perform in the future.
This is an especially important truth now, the past few years have been good, maybe the top of a bull market. So, the funds ranking and performance over the past 3,5 even 10yrs tells you how that fund performs in a bull market, but not how it will perform in a different market just like a players history at one team doesn’t guarantee success at another.
You have probably seen or heard the disclosure, “Past performance is no guarantee of future results.” So, why do we choose how we will invest for the future based on past performance?
There is a better way called forward-looking due diligence. This is more than just looking at how a fund performed but why it performed that way, in that market and how will it be managed going forward in different market conditions. Does the fund adapt and adjust to be successful as a player for a new team, or will it only perform well in certain markets like a player only being effective in one system.
Doing this on your own in all honesty is probably not possible. You need access to the managers; you need to have the knowledge and understanding of what to ask and what you want. The next time you talk to your advisor or they show you something new, ask how they run due diligence. If their answer is centered only around past results then you may end up with your star fund being a bust.
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