One Hit Wonders
When reviewing investment funds it’s important to look at the entire picture. Investors will often seek to invest in funds that have high-performance rankings. If a fund performed particularly well the previous year it likely will obtain a high ranking, but one year isn’t enough to tell you a fund is worthy of your investment. It’s vital to ensure you don’t get trapped into “one-hit-wonders”.
Sometimes a fund manager will make concentrated or higher risk bets in order to drive up performance (in the short term). For example, imagine a fund that experiences a fantastic year by achieving one of the best returns in its category. If that return was the result of a single stock (within the fund) they made a concentrated investment in, that also had terrific gains, it is highly unlikely the fund can repeat the performance. Successful fund managers are also tapped to manage larger funds and can be replaced with new managers that may not be able to maintain the performance of their predecessor.
The examples above are why it’s important to view fund performance over multiple-year periods. If a fund repeats its high performance over a longer period of time it is more likely to maintain said performance (although there are no guarantees)
InvestorKeep monitors all funds to ensure that you are not being weighed down by “one-hit-wonders”. When you receive this alert (titled “one-hit-wonder) InvestorKeep encourages you to connect with your financial professional to see if the fund should remain part of your financial plan.