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Fund Spy

Winning Funds Often Flame Out

A new Morningstar study finds that investors should look beyond past performance when selecting actively managed funds.

It's no secret that investors often interpret past performance as evidence of manager skill and put their money to work accordingly. But risk-taking that paid off in the past may not continue to do so in the future. Luck--good or bad--may also influence past performance, but it's fleeting. Because performance-chasing is so prevalent, Morningstar conducted a study to assess whether there is any merit to selecting actively managed mutual funds based on past performance.

This study differs from others by measuring fund performance relative to peers within several Morningstar Categories over several lookback and holding periods. It also uses more-recent data than many of the papers published on this topic and digs into the drivers behind these return differences. The study found: