Advisors who have been expecting better performance from actively managed funds should consider the latest S&P Persistence Scorecard, which tracks the consistency of top-performing funds over time.
Of 563 U.S. equity funds that placed in the top quartile as of September 2015, only 6.39% remained there by the end of September 2017. Over the five-year period ending in September 2017, less than 1% of 576 U.S. equity funds that started in the top quartile finished in that quartile.
The percentages were a little higher for funds that placed in the top half of their peers over the next three and five years. Almost one-quarter remained in the top half three years later but less than 1% did so five years later.
“It’s difficult for fund managers to stay on top,” says Ryan Poirier, senior analyst at S&P Dow Jones Indices, one of the co-authors of the latest report. “It’s not just a matter of security selection but also about how portfolio managers implement their strategies.”
In addition, says Poirier, trading costs can have an impact on performance, moving a fund from the bottom of the top quartile to the top of the next lower quartile, for example.
The S&P Persistence Scorecard focuses on the performance of different categories of actively managed funds compared with their peer group, not a market benchmark.
Among U.S. equity funds, small-cap and multi-cap funds showed the best relative performance over three years with roughly 7% of small-cap funds and 10% of multi-cap funds remaining in the top quartile over three consecutive 12-month periods.
Over 23% of small-cap funds and over 22% of multi-cap funds placed in the top half over the three consecutive 12-month periods.
(Related: Morningstar’s December Winners & Losers)
The five-year performance figures were much worse. No large-cap, mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year period and no mid-cap or small-cap funds retained that status even after four years.
“This figure paints a negative picture regarding long-term persistence in mutual fund returns,” according to the report.
Bond funds fared better than stock funds. For example, 27% of short-term investment-grade funds continued to place in the top quartile over the three-year period, and over 40% remained in the top half. But those percentages fell by roughly half for the consecutive five-year period.
One of the most dramatic findings of the report was the reversal of fortune for both top and bottom funds over time.
In another part of the report which compared fund performance over two five-year and three-year non-overlapping periods — called transition matrixes — the data found that the best performing funds were more likely to become the worst-performing funds over time, rather than the reverse.
Of the 371 domestic funds that placed in the bottom quartile, 14.56% moved to the top quartile over the five-year horizon, while 23.45% of the top quartile funds moved to the bottom quartile over the same period.
Bottom-quartile funds, however, were more likely to disappear over time through mergers or liquidations. A five-year transition matrix showed that over 30% of large-cap, mid-cap and small-cap funds in the fourth quartile disappeared.
— Check out Top 10 Financial Terms of 2017: Investopedia on ThinkAdvisor.