Lack of Performance Persistence Continues for Actively Managed U.S. Equity Funds

The results are in for the latest S&P Persistence Scorecard. Based on data as of Sept. 30, 2017, the results again highlight the lack of performance persistence among actively managed equity funds. Produced semiannually, the S&P Persistence Scorecard highlights the degree of difficulty faced by active managers to stay at the top of their peer group consistently.

Of the 222 large-cap managers that were in the top quartile as of September 2013, zero could retain this mark for the subsequent four periods. Similarly, for mid- and small-cap managers, within their respective starting universes, no manager was able to maintain their performance. Furthermore, it only took mid- and small-cap managers three years to reduce the universe to zero in the top quartile (see Exhibit 1).

The S&P Persistence Scorecard also provides transition matrices for managers in various quartiles. The transition matrices track the path of managers across different quartiles over time, and therefore present the probability of where a fund may end up. Exhibit 2 shows a direct relationship between the starting group and the probability of being liquidated in the next five-year period. We observe that funds starting in the top quartile, based on the past five-year period, have a 10.24%, 8.96%, 11.11%, and 10.23% change of being merged for All Domestic, All Large, All Mid, and All Small-Cap mutual fund categories, respectively. Furthermore, when the fund was in the bottom quartile to start, these statistics rise to 31.81%, 31.34%, 33.33%, and 37.5%, respectively. This means that a fund is roughly three times as likely to disappear if it started in the bottom quartile versus in the top quartile.

We can also note that with the exception of mid-cap managers, the relationship is strictly increasing. The implication for market participants is such that they should be aware of (and consider) the increased probability that a manager might not be around given their relative performance ranking over a certain period. While past performance does not have an impact on future performance, past performance has some correlation with the likelihood of being liquidated or not.

Past performance is often viewed as a way to select an investment going forward, even though the body of research suggests it to be a poor indicator of future results. The S&P Persistence Scorecard has repeatedly shown that past performance is not a robust metric to use when selecting active managers. Analysis such as that in Exhibit 1 shows that if a market participant were to select a manager based only on performance, there would be less than a random chance that the manager would stay in the first quartile.

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