Which is the Better Guide to Future Performance... the Recent Past or
Ancient History?
In a recent commentary from Morningstar, they report on the performance of their "Fund Analyst Picks" in recent years:
"Our Fund Analyst Picks are the culmination of all our work analyzing 2,000 funds. They represent our picks for the best risk-adjusted long-term performance. We select funds that have a competitive advantage, which gives them a good chance of long-term success. The process is driven by key fundamentals such as management, strategy, costs, stewardship, and long-term performance. Readers new to Morningstar are often surprised that our picks aren't based on short-term performance, but we (and many academics) have found that short-term performance has little predictive value (emphasis added)."
Check that last sentence again. By their lights, then, Upgrading (which relies on a fund's recent 3-, 6-, and 12-month performance to calculate SMI's momentum rankings) is a sure loser. When we read this kind of thing from Morningstar, we're always tempted to go back and check our performance against theirs. This time, we yielded to the temptation. Here's what we found, first quoting from their article and then showing our comparable results.
Morningstar: "Over the trailing five years ended Aug. 31, our domestic equity picks returned 14.07% versus 13.28% for the Wilshire 5000 and 12.0% for the S&P 500..."
SMI: The average of all of our U.S. stock fund recommendations, in all four of our primary risk categories, was 17.31% for the same period.
Morningstar: "Our foreign stock picks returned an annualized 20.67% over the past five years compared with 19.53% for MSCI EAFE..."
SMI: The average of all of SMI's foreign stock fund recommendations was 23.94% for the same period.
So, while their picks slightly edged the market indexes, ours beat theirs (and the indexes) handily. That doesn't mean our approach will always do better over future time periods, but it does suggest they should be a little less condescending. 
- Got a question or comment about this article? Discuss it on our Message Boards.