In an era where active fund management has largely failed to help investors outperform the market, some fixed-income portfolio managers may have staying power—but not much.
In fact, S&P Dow Jones research shows that consistent outperformance is still the exception, not the rule, among active mutual funds.
According to the most recent S&P Dow Jones Indices’ “Persistence Scorecard,” which analyzes the staying power of active mutual fund performance, managers in certain styles of fixed-income mutual funds have a significantly higher chance of persistent outperformance than their peers in the equity universe.
When S&P Dow Jones looked at the entire mutual fund universe, only 1.43 percent of top-performing funds were able to remain in the top quartile of performance within their respective asset classes and styles over a five-year period ending on September 30 of this year.
Yet in several areas of fixed income, fund performance was more likely to persist over the same period. For example, 25 percent of the municipal bond funds in the S&P Dow Jones analysis remained in the top quartile over the five-year study period, as did 10.5 percent of investment-grade short-term corporate bond funds and 6.7 percent of government long-term bond funds.
However, in other styles of fixed-income investing, mutual fund performance was not persistent over time. Not one intermediate-term government bond, mortgage-backed securities, global income or emerging markets debt fund persisted in the top quartile of performers over the five-year study period
According to the scorecard, the likelihood of persistently high performance increased for mutual funds as the bull market aged—yet very few funds posted top-quartile or top-half performance over three- and five-year periods. Only 7 percent of the 550 domestic U.S. equity funds in the top quartile as of September 2016 remained in the top quartile at the end of September 2018.
Small-cap funds were more likely to persist in the top quartile of performers over the five-year study period than large- and mid-cap funds. While 7.69 percent of all small-cap funds were able to sustain top-quartile performance, only 6.6 percent of large-cap funds and 3.95 percent of mid-cap funds were able to do the same.
Once again, S&P Dow Jones found a large amount of variability in fund performance over the study period. For example, more than 10 percent of the domestic funds in the fourth quartile at the beginning of the five-year study period in 2013 actually ended up in the top quartile of performers in September 2018. More than 21 percent of the funds performing in the first quartile at the beginning of the study period ended up performing in the fourth quartile at the end of the study period.
The most recent analysis also confirms previous findings linking performance to the death rate of mutual funds. Of the funds found to be in the bottom quartile of performers at the beginning of the five-year study period in September 2013, 31.6 percent of large-cap funds, 34.7 percent of mid-cap funds and 24.6 percent of small-cap funds disappeared. By comparison, of third-quartile mutual funds, 19.6 percent of large-cap funds, 21.6 percent of mid-cap funds and 16.5 percent of small-cap funds disappeared.