The S&P Persistence Scorecard tries to determine if an active fund manager did well because of their … [+]
At the end of every commercial for a financial-services firm they say a disclaimer so familiar that it goes in one ear and out the other: “Past results are no guarantee of future performance.” This is also written into most mutual fund literature.
Still, most investors consider a funds past performance as a key metric in which funds they choose to buy.
However, this disclaimer is truer than most people would like to believe, according to a study recently released by S&P Dow Jones Indices. The S&P Persistence Scorecard tries to determine if an active fund manager did well because of their skill or merely luck. In short is past performance predictive of future performance? The Scorecard’s key measure of successful active management is a manager’s ability to consistently outperform his peers.
The study concludes, “irrespective of asset class or style focus, few fund managers consistently outperform their peers.”
This shouldn’t come as too much of a surprise to people familiar with index company’s SPIVA (S&P Indices Versus Active) Scorecard. According to SPIVA, “For the one-year period ended June 2019, 71% of domestic equity funds underperformed the S&P Composite 1500,” up from 69% in the previous report. The S&P Composite 1500 tracks 90% of the market capitalization (CAP) of U.S. stocks. Active funds focused on large-cap stocks fared worse against their benchmark (70%), than small-cap and mid-cap funds.
The Persistence Scorecard takes the SPIVA Scorecard one step further. If an investor is lucky enough to own one of the funds in the 29% that beat the benchmark, will that fund continue to outperform?
The report measured the top performing funds in September 2017. A year later less than half the funds, only 47%, maintained their top-quartile performance. By the end of the three-year period ending September 2019, the number of funds that consistently beat their peers plunged. Just 8% of the domestic equity funds remained in the top quartile.
The report said: “This 8% result is consistent with the notion that historical performance is only randomly associated with a future performance.” Broken down the persistence of large-cap funds came in at 7.3%, while mid-caps funds fell to 6.9%. Funds with small-cap stocks did slightly better, with a persistence percentage of 11%
The study shows that “an inverse relationship exists between the time horizon length and the ability of top performing funds to maintain their success. ” At then end of the five-year period ended September 2019, less than 3% of all equity funds kept their top-quartile status. There were no large-cap funds in that 3% group.
However, over the three-year period ended September 2017, more than 44% of the large-cap managers in the top-quartile maintained their top performance in the three-year period ended September 2018. The report said this figure was higher “than what would be expected at random.” For mid-cap funds that fell to 30% and in small-caps funds that sank to 18%. Thus, it was just as likely for a top-quartile fund to fall, as it was to consistently outperform.
By the end of the five-year period, 20% of the top-performing funds in the first period had dropped to the lowest quartile, and 8% of the funds merged with another fund or were liquidated. This proved that underperformance typically precedes a fund’s demise.
For U.S. fixed-income funds, out of 13 categories, seven showed no mangers able to maintain their position in the top-quartile over a five-year horizon.