Is past performance of any use for investors? This study1 investigates whether it makes sense to redeploy assets from underperforming to outperforming managers. Assuming a three-year evaluation period, the authors empirically find that investors who chose managers with poor recent performance would have earned higher benchmark-adjusted returns than those who chose managers with superior recent performance.
This result poses a challenge for asset owners: if past performance should be used at all in selecting managers, it seems that not the underperforming managers, but the best-performing ones should be replaced. The authors acknowledge, however, that a policy of replacing successful managers with poor performers is unlikely to gain widespread acceptance. Instead, therefore, they argue that asset owners should focus on factors other than past performance for manager selection, suggesting a few that have been documented in recent studies.
1 Cornell, Hsu & Nanigian, “Does Past Performance Matter in Investment Manager Selection?”, Journal of Portfolio Managment, Vol. 43, No. 4, pp. 33-43, 2017.
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