If finding an outperforming active mutual fund is like discovering a needle in a haystack, finding a consistent outperformer is more akin to finding a drop of blood in the ocean.
Or as fund managers like to put it: Past performance does not indicate future results.
According to the most recent S&P Down Jones Indices Persistence Scorecard, published last month, while a reasonable percentage of funds outperform their benchmarks based on three-year annualized returns ending on Sept. 30, 2015, only a fraction of these funds continued to outperform over the next three years.
For example, more than a quarter of U.S. equity funds, 28.1 percent, successfully outperformed the S&P Composite 1500 index from Oct. 1, 2012, to Sept. 30, 2015—of a total of 2,702 funds studied, 759 successfully beat the index. However, only 12.81 percent of those 759 funds continued to beat the index from Oct. 1, 2015, to Sept. 30, 2016—and only 6.4 percent of them continued outperforming through Sept 30, 2017. Just 3 percent of those 759 U.S. equity funds were still outperforming the index as of Sept. 30, 2018.
Broken down by category and style, the diminishing prospects for sustained active mutual fund outperformance becomes stark. While 99 of 329—or 30 percent—of actively managed large-cap growth funds were able to outperform the S&P 500 growth index between Oct. 1, 2012, and Sept. 30, 2015, just 3.5 percent of those 99 funds sustained their outperformance over the next three years.
Among domestic funds, several active categories and styles featured a sizable percentage of outperformers in the three years between Oct. 1, 2012, and Sept. 30, 2015—mid-cap value funds, for example, where 41.8 percent of funds outperformed the S&P MidCap 400 Value index, or small-cap value funds, where 28.3 percent of funds outperformed the S&P SmallCap 600 index—but had no funds sustain outperformance for the subsequent three years ending Sept. 30, 2018.
Even when S&P Dow Jones Indices looked internationally, they found a large portion of funds outperforming in the three years ending Sept. 30, 2015—50 percent of international multi-cap equity outperformed the S&P 700. However, when the next three years were examined, fewer than 1 percent of international funds sustained their outperformance.
To prove that today’s outperformers probably won’t sustain their performance through the next three years, the S&P Dow Jones Indices expanded their persistence research to account for cyclical market conditions, studying the rolling average performance persistence for every quarter between March 31, 2003, and Sept. 30, 2018.
For any three-year period, a decent proportion of actively managed funds were able to outperform their benchmarks—on average, almost 33 percent, or 700 of 2401, of all domestic actively managed mutual funds outperformed the S&P Composite 1500 over the previous three years in any quarter in the study—but only 40 percent of those 700 outperforming funds still outperformed by the end of the first subsequent year, only 16 percent by the end of the second subsequent year, and only 5 percent by the end of year three.
Looking internationally, while an average of 32 percent of global actively managed mutual funds were able to outperform the S&P Global 1200 index in any given three-year period, only 6 percent of these outperforming funds were able to sustain their index-beating showing over the subsequent three years.