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18 Aug 2022 - Spotlight - Past Performance Indicates Something... | 17 Aug 2022

By: Spotlight - Past Performance Indicates Something…

17 August 2022

One of the benefits of working at is the easy access to data on over 700 funds, and to be able to analyse different concepts for fund analysis and portfolio construction. This can also be a drawback as it's easy to go down "data" rabbit holes trying to prove or disprove one concept or another.

Recently we tested a portfolio that invested in those funds which performed best (based on returns) over the previous year, and then rebalanced at the end of year to a new list of the best performing funds. The premise of this idea is that the best performing funds in any year will continue to perform for 1-2 years, but accepting the reality that few funds remain on a "top ten" list every year.

Using the Portfolio Builder on, we created a portfolio in July 2017 with the 10 best performing funds in the previous 12 months (July 2016-June 2017). We then rebalanced the portfolio every 12 months in July, investing in the 10 best performers in each of the previous 12 months.

The results were interesting. Very few funds appeared in consecutive years, or more than once, and the geographic and sector exposure changed each year. Asian Equity Funds dominated in the 17/18 year, and the following year quality focused funds formed the bulk of exposure. Funds investing in the small and emerging sector made up the bulk of the portfolio's exposure the year to June 2020, followed by an increase in growth funds in the year to June 2021. The 21/22 year was dominated by funds investing in the tech sector, simply because of that sector's strong performance in the previous 12 months to June 2020.

The outcome of the portfolio was a return of just 3.17% p.a. over 5 years with volatility of 26.36%, and a maximum drawdown of -47.64% in June 2022 thanks to the end of the tech sector's boom in November/December 2021. The graph below shows the portfolio's performance versus the ASX 200 Total Return and the S&P 500 Total Return benchmarks.

To be fair, there were periods, particularly from July 2020 to December 2021 that the portfolio performed well, but the overall result, particularly in the 12 months to June 2022 was disappointing.

However, what happens if we used longer term performance periods as a guide and didn't rebalance?

Once again, using the Portfolio Analysis tool on, we constructed 2 portfolios, one comprised of the 10 top performing funds over a 5 year period to June 2017, and another with the 10 top funds over 3 years to June 2017. This time there was no rebalancing with the portfolio left to grow over the next 5 years to June 2022.

As you can see from the cumulative graph below both portfolios managed to beat the ASX 200 Total Return benchmark but underperformed the S&P 500 Total Return Benchmark.

Top performance means different things to different investors, and ignores ratios and KPI's such as Sharpe and Sortino, which adjust for risk.  What about a portfolio made up of the 10 funds that had the highest 5 year up capture ratio in June 2017, or a portfolio of the 10 funds with the highest 5 year Sortino Ratio?

The portfolio using the 10 funds with the highest Sortino Ratio shows some promising performance in this graph given the relatively low volatility. The portfolio only marginally underperformed the Australian Equity market with standard deviation of just 5.32% compared to 15.25% for the benchmark. For risk averse investors this might be an attractive option.

There were a variety of conclusions from the various approaches:  Certainly the most obvious is that chasing last year's "star" performers is not guarantee of future performance - if anything the opposite is the case as sector performance changes with the current economic and market conditions.  

Another is that rebalancing based on a specific time frame - in our case at the end of each financial year - ignores changes in the market.

Finally "performance" means different things to different investors.  For those just chasing high returns, accept that higher volatility frequently comes with it.

Undoubtedly the disclaimers are right…past performance is not an indicator of future performance. Careful research, diversification and an eye on the market and macro environment are essential.

Over the coming months we will continue to build out examples of portfolios created using the analysis tools. In the meantime, access to the Portfolio Builder is available to Premium Subscribers of and for those who want more information on what this tool can do, please have a look at this video.

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