Looking for consistent active managers is like looking for a handful of needles of excellence in a mountainous rotten haystack.
Advisors and investors often acknowledge that consistent high performance over time may indicate skilled active management, but very few active funds perform strongly across three- and five-year periods, according to “Does Past Performance Matter? The Persistence Scorecard,” a July 2018 report by S&P Dow Jones Indices.
Only 2.33 percent of the 557 domestic equity funds in the research performed in the top quartile of their category in both March 2016 and March 2018. Fewer than 1 percent of the large-cap funds, none of the mid-cap funds and 3.9 percent of the small cap funds were able to remain in the top quartile.
Over the three consecutive 12-month periods ending in March 2018, only 22 percent of large-cap funds, 7.6 percent of mid-cap funds and 13.5 percent of small-cap funds remained among the top half of mutual fund performers.
When a five-year period ending March 2018 was considered, less than half of one percent of large-cap funds and no mid- or small-cap funds were able to remain within the top quartile of funds by performance.
When five consecutive 12-month periods ending in March 2018 were considered, only 11.4 percent of large-cap funds, 1.2 percent of mid-cap funds and 3.6 percent of small-cap funds were able to consistently perform among the top half of funds in their categories.
Performance at the beginning of three- and five-year periods also correlates strongly with survivorship. Active equity funds in the top half of performers at the beginning of a five-year period ending in March 2018 experienced a 11.7 percent chance of being liquidated or merged, while funds in the bottom half of performers at the start of the period had a 26.1 chance of being liquidated or merged by the end of the period.
What’s more, a significant portion of active bond fund managers are likely to be highly inconsistent with their performance relative to their peers. For example, of the 364 funds that ranked among the bottom quartile of fund performance at the beginning of a five-year period ending March 2018, 17 percent moved to the to quartile at some point over the period, while of the 364 funds in the top quartile of performance at the beginning, 26 percent would move into the bottom quartile at some point over five years.
Over the three-year period ending March 2018, fixed-income funds were more likely to experience performance persistence over the study period, especially if they were ranked in the top quartile of performers at the beginning of the period. Over five years, the persistence nearly disappears across all sectors of active fixed income, according to the study.
For its analysis, S&P Dow Jones Indices uses the University of Chicago’s CRSP Survivorship Bias Free Mutual Fund Database to rank all funds available by performance at each point in time, tracking the top-half and top-quartile performers through each time period.