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Does Past Performance Matter? The Persistence Scorecard

When it comes to the active versus passive debate, one of the key measurements of successful active management lies in the ability of a manager or a strategy to deliver above-average returns consistently over multiple periods. Demonstrating the ability to outperform peers repeatedly is the one way to differentiate a manager’s luck from skill.

According to the S&P Persistence Scorecard, relatively few funds can consistently stay at the top. Out of 563 domestic equity funds that were in the top quartile as of September 2015, only 6.39% managed to stay in the top quartile at the end of September 2017. Furthermore, 6.48% of the large-cap funds, 1.23% of the mid-cap funds, and 6.82% of the small-cap funds remained in the top quartile.

For the three-year period that ended in September 2017, persistence figures for funds in the top half were closer to the random expectation than that of the top quartile. Over three consecutive 12-month periods, 19.49% of large-cap funds, 18.52% of mid-cap funds, and 23.11% of small-cap funds maintained a tophalf ranking.

An inverse relationship generally exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that no large-cap, mid-cap, or small-cap funds managed to remain in the top quartile at the end of the fiveyear measurement period. Furthermore, no mid-cap or small-cap funds were able to retain their status as of the end of the fourth period. This figure paints a negative picture regarding long-term persistence in mutual fund returns.

Similarly, only 4.73% of large-cap funds, 6.47% of mid-cap funds, and 5.49% of small-cap funds maintained top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.25%.

The transition matrices are designed to track the performance of top- and bottom-quintile performers over subsequent time periods. The data show a stronger likelihood for the bestperforming funds to become the worst-performing funds than vice versa. Of 371 funds that were in the bottom quartile, 14.56% moved to the top quartile over the five-year horizon, while 23.45% of the 371 funds that were in the top quartile moved to the bottom quartile during the same period.

Our research also suggests that there is consistency in the death rate of bottom-quartile funds. Across all market cap categories and all periods studied, fourth-quartile funds had a much higher rate of being merged or liquidated. The five-year transition matrix shows that 31.34% of large-cap funds, 33.33% of mid-cap funds, and 37.5% of small-cap funds in the fourth quartile disappeared.

Compared with domestic equity funds, there was a higher level of performance persistence among the top-quartile fixed income funds over the three-year period ending September 2017. Government Short, Government Intermediate, and Emerging Markets funds were the only categories in which the results showed no performance persistence.

Over the five-year measurement horizon, the results show a lack of persistence among nearly all the top-quartile fixed income categories, with a few exceptions. Funds investing in long-term government bonds, short-term investment-grade bonds, and high yield bonds were the only groups in which a noticeable level of persistence was observed.