A few weeks ago in the ongoing international battle of “viral” videos, a new world champion was crowned in the five-day category. According to whoever keeps track of such things, the Kony 2012 video reached 80 million views in a mere workweek. According to the same people who keep track of such things, this video shaved off a full day from the time it took Susan Boyle (the former champion) to reach 70 million views in her video where she sang, “I Dreamed a Dream.”
The producers followed up their Kony 2012 video with the April 5 release of Kony 2012 — Part II (apparently catchy titles are not their specialty). Following the same formula (and learning from their last runaway success), you would assume that this new video would equal (or at least come close to) the success of the first. If anyone knows how to make a successful viral video, certainly the creators of the reigning five-day world champion would. Unfortunately, it seems that this is not case. As of the 3rd week of April, the second video has 98% fewer views than the original.
Viral Videos and Money Managers
It seems that viral video producers have at least one thing in common with actively managed mutual funds – past performance is no guarantee of future results. As the following graphic illustrates, actively managed mutual funds that achieve top performance in one period typically do not repeat their success in future periods.
The stacked graph sorts the entire U.S. equity fund universe by cumulative five-year performance relative to each fund’s benchmark (includes only those funds with a complete return history for the period). As shown, the top performing 25% of these funds comprises 377 funds. The right box shows how these top-quartile funds performed relative to their benchmarks in the subsequent five-year period. The arrows indicate the movement of these top funds across quartiles.
Only 8% of the top-quartile funds repeated their top performance in the subsequent five-year period. Seventy-five percent of the funds dropped to the second, third or bottom quartiles. These top-performing managers showed no ability as a group to repeat their top-quartile performance. In fact, 15% of these previously top-performing funds didn’t even survive!
Investing Through the Rear View Mirror
The lesson of this illustration and the Kony 2012—Part II video? When it comes to viral video producers and actively managed mutual funds, past performance is a perfect predictor of past performance. However, it is an especially lousy predictor of future performance. So the next time you are tempted to invest based on the recent performance of an actively managed mutual fund, just remember the Kony 2012—Part II video!