The phrase "past performance is not an indicator of future results" is a disclaimer that is often found on many reports. If ignored by investors, it is done so at their own risk. Semi-annual research from S&P Dow Jones Indices serves as a cautionary sign to anyone who chooses a fund just on its success in one 12-month period.

S&P Dow Jones Indices published the results of its September 2016 persistence scorecard. The scorecard tracks the consistency of top performers over yearly consecutive periods and measures performance persistence through transition matrices. The University of Chicago's Center for Research in Security Prices (CRSP) Survivorship Bias Free Mutual Fund Database serves as the underlying data source. To avoid double-counting multiple share classes, only the largest share class of a fund is used.

For the three years ended September 2016, the persistence scorecard showed that just 18% of large-cap funds, 23% of mid-cap funds and 21% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. (Performance is based on equal weighted fund counts.) Random expectations, such as using a two-sided coin, would suggest a rate of 25%.

If this data does not encourage you to consider passively managed ETFs such as iShares Core S&P 500 (IVV 228 Overweight) or Vanguard Large-Cap Index (VV 104 Overweight), be mindful that the once hot active mutual funds (those in the top quartile) might very well end up in the bottom quartile soon after. According to the S&P Dow Jones study, of 588 domestic equity funds that were in the top quartile, 35% moved into the bottom quartile during the three-year horizon. Meanwhile, for bottom quartile funds that did not get merged or liquidated, a 14% moved to the top quartile over the same period. As such CFRA, which acquired S&P Global Market Intelligence's fund business in October 2016 and remains independent from S&P Dow Jones Indices, recommends investors look beyond just a period of relative out- or underperformance.

Our mutual fund research incorporates the valuation and risk traits of each fund's holdings and fund expenses in addition to risk-adjusted performance records.

We contend that part of the underperformance of an actively managed fund stems from its expense ratio. While the average large-cap core mutual fund has a 1.1% expense ratio, there are many funds with lower costs. Since expense ratios eat into investor returns, choosing strong performing funds that cost less increases the likelihood of consistent gains.

For example, Vanguard Growth & Income Fund (VQNPX 44 *****), a CFRA five-star fund, is on pace in 2016 to outperform its large-cap core peers for the seventh straight year. VNQPX has a below-average standard deviation and incurs a modest 0.34% net expense ratio. Many fund holdings, including Johnson & Johnson (JNJ 116 ****) and Altria (MO 67 *****) are viewed by CFRA as being both attractive and of high quality.

T Rowe Price Dividend Growth (PRDGX 38 *****), another CFRA five-star fund, is also poised to end this year outperforming its large-cap core peers, aided by its low 0.64% expense ratio. If it succeeds, this would be the third consecutive year. PRDGX underperformed this same group in 2012 and 2013, highlighting the challenges of ignoring funds that lag their peers. Here too appealing holdings, including Comcast (CMCSA 70 ****) and PepsiCo (PEP 106 ****), help the fund's ranking.

While the S&P Dow Jones Indices data is not favorable toward active mutual funds, we believe investors can find funds with a combination of strong attributes.