Numbers don’t tell everything. Outperformance is one period could be simply due to the fact that the market environment suited the stock portfolio. A fund true performance potential needs to be evaluated within the content of market environment during the different periods used.
As we known, market conditions change rapidly and frequently. A fund manager who is good in delivering strong returns in a particular type of market conditions may fail when market condition changes. As such, in fund selection, you need to understand how different types of market condition affect the performance of a fund.
Past performance is only used to explain the past. It is an ongoing process that is supported by both qualitative and quantitative analyses. The investors should apply a lost of screening criteria to narrow down the numbers of funds under consideration. Then only use historical performance measures to evaluate the screened list.
While it is not something that you could completely rely on, it is a good way to ascertain the trend. Lesson can be learnt from the past as long as it’s accepted that none of the performance statistics can predict absolute performance or absolute rankings in any kind of time frame.