Past Isn’t Always Prologue for Performance of Funds

Top-performing and poor-performing mutual funds are unlikely to repeat their 1998 records if the past is any guide, according to a study by Financial Research Corp.

An examination of one- and three-year returns of core U.S. stock funds found that the performers in either the top or bottom 10% “reverted, on average, to the mean in the following year,” Financial Research said Wednesday. The Boston firm reviewed 10 years’ worth of performance data on 766 portfolios representing $1.2 trillion in assets.

“Chasing hot funds can be disappointing,” said James Crandall, an analyst at Financial Research.

One factor is that successful funds attract huge amounts of new assets, and putting that money to work effectively is increasingly hard, Crandall said.

Still, he said two funds that have grown in size while beating their peers consistently during the last five years are Washington Mutual Investors, managed by Capital Group Cos.’ American Funds unit, and Janus Growth & Income, managed by Janus Capital Corp., a unit of Kansas City Southern Industries Inc. And Fidelity Investments’ flagship Magellan Fund, America’s biggest mutual fund, “has been no slouch recently,” and has been a consistent above-average performer during the last year, he noted.

Financial Research also studied five years’ worth of performance on the funds earning three, four and five stars from fund tracker Morningstar Inc. in 1993 through 1997 and found no difference in performance between the three top groups in the following year.

The message that past performance isn’t useful in picking future winners hasn’t reached investors. The funds ranked highest by Morningstar--18% of the 7,075 stock and bond funds sold in the U.S.--took in almost 75% of the $221 billion of new investments last year, Financial Research said.