Perspective :

The perils of relying on past performance

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Why a forward-looking approach matters.

In the world of investing, past performance is often relied on as a key indicator of future success. However, as the saying goes, “past performance is not a guarantee of future results.” Relying too heavily on past performance can lead investors down a risky path, causing them to make decisions based on short-term trends rather than long-term potential. This is especially true when it comes to choosing fund managers.

The fallacy of relying on past performance: Lessons from fund manager data

A study of fund manager performance data reveals a striking trend: top-quartile fund managers, those who have outperformed their peers in the past, often fail to maintain their success over time. The data shows that the majority of top-quartile fund managers fall from their high-ranking positions within five years.

Source: Morningstar, December 31, 2023. This study evaluated fund performance over rolling periods from 1999 to 2023. Each year, funds are sorted within their category based on their previous five-year total return. Those ranked in the top quartile of returns are evaluated over the following five-year period. The chart shows the average percentage of top-ranked equity and fixed income funds that kept their top ranking in the subsequent period. See disclosures at end for important information regarding “Data Sample” for this exhibit. Past performance is not indicative of future results.

This pattern highlights the risks of relying too heavily on past performance when making investment decisions. While a fund manager’s track record can certainly provide insight into their skills and strategies, it is not a guarantee of future success.

A forward-looking approach: The importance of manager selection and portfolio construction

Instead of chasing the latest hot fund or stock, investors should adopt a forward-looking approach that emphasizes long-term potential and risk management. This approach involves carefully selecting fund managers based on their investment philosophy, process, and team, as well as constructing a well-diversified portfolio that is tailored to the investor’s goals and risk tolerance.

Working with an advisor and a firm, like Frontier, that specializes in manager selection and portfolio construction can be particularly beneficial in this regard. These firms have the expertise and resources to evaluate fund managers based on a wide range of factors, including their investment process, team stability, and alignment of interests with investors.

A forward-looking approach to investing and partnering with a reputable advisor and firm can help investors build a portfolio that is adaptable, and capable of weathering market fluctuations and delivering long-term growth.

Past performance is no guarantee of future returns. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any type of securities and no investment decision should be made based solely on the information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees, and expenses. Frontier may modify its process, opinions, and assumptions at any time without notice as data is analyzed.

Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third-party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement.

Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions, and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries, or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment, or tax advice. Frontier does not directly use economic data as a part of its investment process.

Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.

Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www. frontierasset.com. They include important disclosures and should be read carefully. Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.

 

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