UK's Financial Services Authority Publishes New Analysis On Relevance Of Past Performance Data

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 CRA's decision to conduct their analysis of performance persistence using "raw" returns is not justified:

1. Higher risk tends to mean higher returns.

2. 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.

3. 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.