The usual table shows 1, 3, 5, 7, 10 years.
Assume a 10 yr old fund & equal return p/a – park compounding for now.
The latest year’s performance contributes:
100% of the 1st column
33% of the 2nd – 3yrs
20% of the 3rd – 5 yrs
14% of the 4th – 7yrs
10% of the 10th – 10yrs
Whereas the 1 yr performance 10 years ago, contributes 0% of the 1, 3, 5, & 7 year columns.
And only 10% of the 10 yr column, yet it’s also the performance of one of the 10 years?
Meaning the latest year’s performance = a 36% weighted contribution to the table vs 1 year performance of 10 years ago = 2% weighted contribution (10% contribution to 1 column of 5).
A blowout recent year skews this even more.
Conclusion – these tables are massively weighted to recent performance.
So how predictive is 1yr performance?
Most funds track benchmarks, so here’s a scatter plot over 30 years of 1-year perf of MSCI World (x-axis) & subsequent 1-year perf (y-axis), and it has an R2 of 0.003.
So zero predictability, same for 3 & 5yrs.
Is your best chance to buy when 1-year performance has been absolutely terrible?
Or just buy what makes sense.
Source: Bloomberg, MSCI
