By T.J. Kistner, CFA, CAIA, Chief Investment Officer at Retirement Plan Advisors, and Alex Gault, CFA, Senior Investment Analyst at Retirement Plan Advisors
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When evaluating investment options, one of the most highly scrutinized factors is performance. Generally speaking, the evaluation of performance is not prone to some of the behavioral biases embedded in other, more subjective assessments and is relatively easy to understand.
Past performance has either been better or worse than a benchmark (or a peer group). And, as the SEC and other regulatory bodies warn us, “past performance is no guarantee of future results.” Undoubtedly, investors draw comfort in strong historical returns, and a rigorous investment research and due diligence process must include historical performance, which can serve as validation of an investment manager’s skill or ability to offer a differentiated way of generating outperformance.
However, as RPA’s analysis confirms, performance persistence is extremely difficult to predict within actively managed mutual funds. Plan sponsors and investors should not make investment decisions solely based on past returns…