Fleeting Alpha: Evidence from the SPIVA and Persistence Scorecards

S&P Dow Jones Indices
S&P Dow Jones Indices

The phrase “past performance is not an indicator of future results” (or some variation thereof) can be found in the fine print of most funds’ literature. Despite a wealth of studies showing a lack of long-term performance persistence among actively managed mutual funds, 1 many market participants consider past performance and related metrics to be important factors in manager selection. The decision to use past performance in this way most likely stems from the conviction that winners persist—in other words, that a manager who outperformed last year is likely to outperform this year.

Since 2002, S&P Dow Jones Indices has published the SPIVA® U.S. Scorecard, which measures the percentage of managers that outperform their benchmarks across various equity and fixed income categories, and the Persistence Scorecard, which measures the likelihood of a top quartile manager repeating the same status over consecutive three- and five-year horizons.

With this paper, we marry the two reports by studying whether a group of funds that outperform their benchmarks in one period can subsequently persist in delivering alpha in consecutive periods. We measure this by tracking a group of funds that outperform the benchmark, based on three year annualized returns, on a net-of-fees basis. We then examine whether these outperforming funds (the “winners”) can continue to outperform during each of the subsequent three one-year periods.

One of the key measurements of successful active management is the ability of a manager to deliver consistent positive excess returns for some period, on a net-of-fees basis. This is particularly important in light of the secular trend toward low-cost, passive investment vehicles, which increasingly compete with active managers for capital.

Our research adds to the growing body of literature on active management’s performance and the persistence of alpha. We attempt to identify the likely persistence of a manager’s ability to generate positive alpha (whether due to luck or skill). With the exception of large-cap value managers, the data show negligible performance persistence across most domestic equity categories beyond a one-year horizon. The odds of identifying a superior manager in advance seem to improve in alternative asset classes such as real estate. It is possible that additional factors, such as benchmark mismatch and/or asymmetric information due to uniqueness of each property or location may have contributed to higher persistence observed among real estate funds.

Executive Summary

  • One of the key measurements of successful active management is a manager’s ability to deliver consistent positive excess returns over a given period, on a net-of-fees basis.
  • We study whether a group of funds that outperform their benchmarks in one period can subsequently persist in delivering alpha in consecutive periods.
  • We measure this by tracking a group of funds that outperform the benchmark on a rolling quarterly basis, based on annualized returns over the past three-year period. We then examine whether these outperforming funds (the “winners”) can continue to outperform during each of the three subsequent one-year periods.
  • With the exception of large-cap value managers, the data show negligible performance persistence across most domestic equity categories beyond a one-year horizon.
  • The data indicate the difficulty market participants face in finding a skillful manager that can offer consistent alpha on a near- to mediumterm basis. Therefore, market participants may not be best served by picking managers based solely on past performance.
  • For example, out of 1,034 large-cap funds that existed in the universe as of Sept. 30, 2013, only 19.73%, or 204 funds, outperformed the S&P 500®
  • In the following year, 15.69% of those 204 funds outperformed the benchmark. By the end of the third year, none of those original 204 funds were able to outperform the S&P 500 on a consecutive basis.

Want to keep reading?

Download Article