The Best Investment Writing What Short-Term Fund Performance Tells Us About Future Returns - Daniel Sotiroff , Morningstar
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Dec 2, 2025 
Daniel Sotiroff, a Senior Manager Research Analyst at Morningstar, dives into the intriguing results of his report on fund performance. He reveals that short-term success often fades quickly, with top-quartile funds losing their edge within three years. Discover how passive funds mirror these trends and why randomness plays a significant role. Sotiroff also highlights that volatility can drastically reduce performance persistence and emphasizes the importance of management processes over past returns for long-term success.
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Top Performance Rarely Lasts
- Persistent outperformance is rare among mutual funds and ETFs despite being highly valued by investors.
- Consistent outperformance signals repeatable skill but occurs in only a small fraction of funds.
Top-Quartile Status Fades Quickly
- Few funds that ranked in the top quartile in one year remained there over the next three years across many categories.
- Passive funds often fared worse than active funds for short-term category-relative persistence.
Passive Funds Reflect Market Segments
- Passive funds' short-term ranking ties closely to their market segment's performance and often reflects the category average.
- That similarity makes passive funds likely to produce middling short-term relative returns.