Today’s worst funds will be tomorrow’s best, analyst says

When combing through the wreckage for new investment ideas, financial advisers would be wise not to ignore those mutual funds and separate-account strategies at the bottom of the heap. “It may be prudent to heed the historical relationship between past and future returns,” according to Frank Nickel, director of manager selection strategy for Smith Barney in New York. Historically, mutual fund and separate-account managers whose returns have been in the top 10% or the bottom 20% of their universe over the previous three years are prone to outperform for the next three years, according to his research. The strongest returns, Mr. Nickel added, are likely to come from the managers in the bottom 20%. Financial advisers might also proceed with caution when considering a money manager whose historical performance has been in the top half of its category but not in the top 10%: These are the funds most likely to produce the weakest returns, according to Mr. Nickel’s research.