Putting Past Performance of Active Mutual Funds in Perspective

Asset managers of actively managed equity funds crow about the benefits of active management during downturns and volatile markets like the one we’re currently experiencing. While that may be true of individual funds at certain times, it’s not true of most actively managed funds over time.

In its latest persistence scorecard, S&P Dow Jones Indices reports that just 21% of top-performing U.S. equity funds over the 2010-2014 period remained in the top quartile over the following five-year period, from 2015-2019. Moreover, 10% disappeared through merger or liquidation.

Almost 30% of the poorest performers, in the bottom quartile for 2010-2014 period, closed during the subsequent five-year period, and multi-cap funds were the most vulnerable, with 38% merging or liquidating.

“The one pattern that did hold across equity funds was the tendency of the poorest [performing] funds to close,” according to the report written by Berlinda Liu, director of global research & design at S&P Dow Jones Indices.

These performance patterns among top and bottom performers were evident also during a shorter three-year periods, when comparing performance from 2014-2016 to performance from 2017-2019.

Less than 13% of U.S. equity funds in the earlier three-year period remained in the top quartile during the following three-year period, but just 7% closed.

These patterns were true for all types of equity funds, whether large-cap, mid-cap, small-cap or multi-cap, but multi-cap and small-cap funds performed the worst of all.

Less than 17% of top quartile multi-cap performers remained in the top category when comparing the two five-year periods and less than 2% of small-cap funds sustained their top quartile performance quartile when comparing the two three-year periods.

Top-performing U.S. bond funds had more staying power than their U.S. stock fund counterparts, according to the S&P Dow Jones Indices report. 

Fifty percent or more of top quartile long-term and intermediate government bond funds and long-term investment-grade bond funds during the 2010-2014 period remained in the top quartile during the subsequent five-year period.

Performance during the three-year periods was even better. Ten of 12 bond fund categories in the top quartile from 2014 to 2016 remained at the top at the end of the 2017-2019 period.

They included short-, intermediate- and long-term government bond funds and investment-grade bond funds as well as mortgage-backed securities funds, general muni bond funds and California and New York muni funds.

— Check out 12 Top-Performing ETFs in First Half of 2020 on ThinkAdvisor.