Past performance a guide to the future?

Analysing the consistency of investments and opportunities is key to understanding where risk lies, writes Peter McGahan.

investment performance

 Ah there is the holy grail of all questions. Fundamentally, it’s all down to the quality of the questions you ask of the performance.

What we do know is that if you were invested into a pension over the last twenty years and had chosen the worst performer versus your golf partner who had chosen the best, there would be £469,000 more in their pension than yours. That’s a lot of ribbing to take over eighteen holes.

So how can we tell who the better performers will be in the future so as to insure the best retirement and the most options with your money?

We start first by not making mistakes.

Fund management companies want to attract your money so they market when they are doing well not when they are doing badly of course.

That’s natural but you need to ensure your financial adviser is looking closely at where the performance is coming from so you aren’t bitten. Looking at it incorrectly could cost you dearly and have you queue jumping and never in a position to recover.

Stay with me on this, it’s very important.

Fund managers often use their five, three or one year performance data. On the face of it they look like they are number one over each of those periods and a natural choice with your money.

Looking more closely, you need to know that this year’s performance is also counted in the five years, in the three years, and of course in that last year. It can easily be double counted.

If I break the five years down as I did with a recent fund into discreet years, I could see this year it was top out of 67 other funds, top last year, but in each of the previous three years it was virtually bottom of the pile.

And so it wasn’t actually top over five years as this type of marketing misleads us to believe.

Something had happened in the last two years. So we looked a bit closer and could see that it had simply been exposed to FAANG stocks (Facebook, Amazon, Netflix etc.) over the last two years. With so much passive money invested into these stocks, they had become overvalued and a form of a bubble. Had you bought using the first method of research above, you would have been hammered after the bubble deflated.

As we pointed out a few weeks ago, such a deflation was pretty obvious and would be exaggerated as much on the downside as it was on the upside.

You can now see that first hand. At the time of writing Facebook was trading at $151 from its high of $217 this year, Netflix $418 to $325 and Amazon down 6.15% today alone.

As a consequence the above fund is down 6.5% for the month and nearly 4% more than its benchmark.

The skill is to take the research down to as small a period as possible. Your adviser will do worse than to take the performance of each fund in each month for the last 60 months and assess how consistent it is in each month. By doing that, you will avoid those one-off spikes that would lead you to move into the other queue just as the lady goes on a break!

They should also be sure you are using a fund that is taking the least amount of risk for the return you want, or conversely achieving the best return for the risk you are taking. An adviser can easily do that.

Admittedly, our research would drop down many layers further than this but space and very boring reading prohibits that.

It’s not possible to go into full detail on how to really achieve the right answer, but avoiding the above mistakes means you won’t be guaranteeing to buy the wrong fund at exactly the wrong time.

A good adviser will use numbers (quantitative) as well as qualitative questions. Equally as valuable to each other this iterative cycle washes off all the noise and marketing, and takes us to the gold nuggets.

If you would like any advice please call, 01872 222422 or visit us on

About the author

Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.

Last modified: June 10, 2021

Written by 4:24 pm News & Views