New analysis on relevance of past performance data published
08/04/2003
The Financial Services Authority has today published an independent analysis by Professor David Blake, of Birkbeck College, University of London, and Professor Allan Timmermann, of University of California, San Diego, of the relevance of past performance data for consumers investment decisions.
In their report, commissioned by the FSA to provide independent analysis of a previous report by Charles River Associates (CRA) for the Investment Management Association (IMA) on the persistence of performance in mutual funds, Blake and Timmermann argue that CRAs decision to conduct their analysis of performance persistence using raw returns is not justified:
Higher risk tends to mean higher returns.
The absence of risk adjustment, that is raw returns, is likely to divide mutual funds according to their levels of risk exposure and not according to the degree of fund manager skill or value-added.
Performance figures based on raw returns are likely to induce investors to choose mutual funds with high risk over mutual funds with low risk.
Blake and Timmermann conclude that to compare the performance of any two funds, it is better to use risk-adjusted data that take into account the degree of risk in each fund's investment strategy.
The FSA welcomes this analysis for its contribution to the past performance debate and will carefully consider its implications. It continues to encourage further work in this area to inform its policy decisions.
The full report "Performance Persistence in Mutual Funds" is available on the FSA's website at www.fsa.gov.uk.
Notes for editors
In 2002, Charles River Associates produced for the Investment Management Association (IMA) a report on the persistence of performance in mutual funds (Performance Persistence in UK Equity Funds An Empirical Analysis, October 2002). This report differed from previous studies in focusing on raw returns data. It found greater evidence of persistence in raw data than the previous studies had found in risk-adjusted returns.
The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.
The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.