Investors and advisors using the past performance of actively managed mutual funds and ETFs as a guide for choosing among funds should do so with caution.
According to the latest S&P Dow Jones Indices Persistence Scorecard, very few U.S. funds that placed in the top quartile for performance among their category peers remained in the top quartile over three and five consecutive 12-month periods and over two non-overlapping three-and five-year periods — all ending on March 31, 2018.
Moreover, there was a stronger likelihood that top-performing funds would become worst-performing funds rather than vice versa. Of 364 funds in the bottom quartile, 17% moved to the top quartile over the five-year horizon while close to 26% of top performers fell to the bottom quartile over the same period, according to the scorecard.
Bottom performers, however, had a much higher rate of disappearing either through mergers or liquidations. Slightly more than one-third of large-cap and mid-cap funds in the bottom quartile as well as 29% of the lowest-performing small-cap funds disappeared over the five-year transition matrix.