Australia Persistence Scorecard: Year-End 2022

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Canada Persistence Scorecard: Year-End 2022

Latin America Persistence Scorecard Year-End 2022

Europe Persistence Scorecard: Year-End 2022

U.S. Persistence Scorecard Year-End 2022

SPIVA - May 29, 2023

Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Tim Edwards

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

Anu R. Ganti

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

Grace Stoddart

Quantitative Associate, Index Investment Strategy

S&P Dow Jones Indices

Summary

Can investment results be attributed to skill or luck? Genuine skill is more likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s relative performance. The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance is typically relatively short-lived.

Almost no Australian funds remained in the top performance quartile within their category over five consecutive years, and none did so in four out of five reported fund categories (see Report 2).

Lowering the bar from the top quartile to the top half did not result in a significant improvement in persistence. As Exhibit 1 illustrates, the decline in persistence across categories was consistently worse than would be expected under a random distribution.

Exhibit 1 - Australia Persistence Scorecard: Year-End 2022

Report Highlights

A minuscule percentage of actively managed equity, A-REIT and fixed income funds succeeded in maintaining consistent outperformance relative to their peers over the three- and five-year periods ending in December 2022. Persistence of alpha was rare as well: 149 Australian Equity General funds (out of a total of 346) outperformed the S&P/ASX 200 as of December 2020, and only 28 of those 149 winners—less than one-fifth—managed to continue outperforming annually through December 2022 (see Report 1b).
Of the actively managed International Equity General and A-REIT funds whose 12-month performance placed them in in the top quartile of their respective category as of December 2020, not a single fund maintained its top-quartile performance over the next two 12-month intervals. Extending the analysis to five consecutive years made no difference (see Report 1a and Report 2).
There was less conclusive evidence for or against persistence when measured over non-overlapping three-year intervals, in which the cross-category average chance of a top-quartile fund remaining in the top quartile was 25%. Extending the horizon to two consecutive five-year periods improved the average slightly to 33% (see Reports 3 and 5).
Poor performance continues to be an indicator of future fund closures. Across the five categories reported by our scorecard, an unweighted average of 44% of actively managed funds whose performance placed them in the bottom quartile of performance in the five years ending in December 2017 were subsequently merged or liquidated over the next five years (see Report 5).

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SPIVA - May 23, 2023

Canada Persistence Scorecard: Year-End 2022

Joseph Nelesen, Ph.D.

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

Anu R. Ganti

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Summary

Can investment results be attributed to skill or luck? Genuine skill is more likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s performance relative to its peers. The Persistence Scorecard evaluates consistency and shows that in every style and geographic focus, active management outperformance diminishes over time, with few funds consistently outranking their peers.

Canadian equity indices suffered sharp declines in the first half of 2022, followed by fluctuations in the second half before finishing the year slightly negative. Canadian Equity funds fared better than usual, with only 52% underperforming over the one-year period. Among all Canadian domestic equity funds ranked in the top quartile of performance over the 12-month period ending December 2018, none maintained a top-quartile position for the next four years (see Report 2).

Canada Persistence Scorecard Year-End 2022: Exhibit 1

Exhibit 1 shows that among Canadian Equity funds ranked in the top half of peer rankings over the five-year period ending December 2017, 45% remained in the top half, while 55% fell to the bottom half, merged/liquidated or changed investment styles (see Report 6).

Report Highlights

− While slightly more than expected actively managed domestic equity funds maintained their top-quartile ranking for a few 12-month periods, persistence of ranking soon fell below what would be expected by random chance. Over five years, none were able to maintain their top-quartile ranking (see Report 2).

− Among actively managed domestic equity funds with top-quartile performance over the 12-month period ending December 2020, 9% of Canada Equity funds and 6.7% of Canada Dividend & Income Equity funds maintained top-quartile performance over the subsequent two 12-month intervals. In every other category, no funds maintained top-quartile performance over three 12-month periods (see Report 1).

− Across a five-year horizon, evidence of persistent active fund outperformance was nonexistent. Within the group of active funds achieving top-quartile performance in their respective categories over the 12-month period ending December 2018, not a single fund remained in the top quartile through each of the subsequent one-year periods through December 2022 (see Report 2).

− Over discrete five-year periods, a greater-than-expected proportion of funds in two domestic equity and three international equity categories maintained their relative performance standing compared with their peers. If performance were purely random in terms of comparing funds to their peers, one would expect 25% of top-quartile funds to remain in the top quartile in a subsequent period. Our scorecard reports an unweighted average of 40% of top-quartile Canadian Equity, 41% of top-quartile Canadian Focused Equity funds, 50% of top-quartile Global Equity funds, 31% of top-quartile International Equity funds and 46% of top-quartile U.S. Equity funds remained in the top quartile over two consecutive five-year periods (see Report 5).

− Underperformance significantly increased the risk of fund closures. For example, across all actively managed equity funds in four domestic categories (Canadian Equity, Canadian Focused Equity, Canadian Dividend & Income Equity and Canadian Small/Mid-Cap Equity) that were in the bottom half of performance in the five-year period ending in December 2017, more than 35% were subsequently merged or liquidated over the next five years. In contrast, among all funds in the top half across those same four categories for the five-year period ending December 2017, less than 18% were liquidated or merged in the subsequent five-year period (see Report 6).

− While liquidation was a more likely outcome for lower-ranked funds, style changes shared no strong relationship with underperformance. Over five-year horizons for all four domestic equity categories, the highest rate of style change, at 21%, actually occurred within the top-quartile Canadian Dividend & Income Equity funds. The average rate of style changes across all categories for top-quartile funds was 8%, while for bottom-quartile funds it was 5% (see Reports 5 and 6).

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SPIVA - May 18, 2023

Latin America Persistence Scorecard Year-End 2022

Joseph Nelesen, Ph.D.

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

Benedek Vörös

Director, Index Investment Strategy

S&P Dow Jones Indices

Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Summary

Can investment results be attributed to skill or luck? Genuine skill is more likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s performance relative to its peers. The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance tends to be relatively short lived, with few funds consistently outranking their peers.

Among a total of 193 funds in our seven reported regional fund categories across Brazil, Chile and Mexico whose performance placed them in the top quartile for the 12-month period ending December 2018, only two funds (less than 5%) managed to remain in the top quartile for each of the next four years (see Report 2). Exhibit 1 illustrates that across all categories except one, less than 50% of funds were able to repeat their top-half status over two consecutive five-year periods.

Exhibit 1: Percentage of Funds Repeating in Top Half over Two Consecutive Five-Year Periods

Report Highlights

Brazil

Brazil’s top-performing equity fund managers did not maintain their outperformance in subsequent years. Among equity funds ranked in the top-quartile for the 12 months ending December 2018, none remained consistently in the top quartile over the subsequent three one-year periods (see Report 2). Active fund outperformance in 2020 did not predict outperformance in the two subsequent years (see Report 1b).
The Brazil Government Bond funds category showed similar erosion of outperformance, with precisely zero top-quartile managers as of December 2018 managing to remain in the top quartile for the subsequent four 12-month periods (see Report 2).
Brazil Corporate Bond funds fared slightly better, with 4.8% of managers maintaining consistent top-quartile performance for five years in a row, and 33.3% remaining in the top quartile for two consecutive five-year periods (see Report 2 and Report 5).

Chile

The rarity of persistence by equity managers was equally visible in Chile, with only one out of nine (11.1%) of the top-quartile funds in the first 12-month period repeating its outperformance for the subsequent four years (see Report 2).
Report 3 shows that 25.0% of the top-quartile funds in the first period of the three-year transition matrix remained in the top quartile at the end of the second period.
Among funds ranked in the top half for the three years ending December 2019, the majority either fell to the bottom half, were merged or were liquidated over the subsequent three-year period (see Report 4).

Mexico

Similar to the other regions, top-quartile managers in Mexico had difficulty replicating their rank in subsequent years. After one year, just 18.2% of Mexico Equity funds remained in the top quartile, and after four years, none remained (see Report 2).
The five-year transition matrix shows that 60% of top-quartile funds subsequently dropped to quartile three or four over the five-year period, or were merged or liquidated, while only 20.0% remained in the top (see Report 5).
Consistent with data from the SPIVA^® Latin America Year-End 2022 Scorecard, Mexico had a higher fund survival rate than Brazil and Chile across all periods measured. Reports 3, 4, 5 and 6 show that, on average, Mexican funds were less likely to be shut down than Brazilian and Chilean funds.

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SPIVA - May 16, 2023

Europe Persistence Scorecard: Year-End 2022

Benedek Vörös

Director, Index Investment Strategy

S&P Dow Jones Indices

Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Joseph Nelesen, Ph.D.

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

Summary

Can investment results be attributed to skill or luck? Genuine skill is more likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s performance relative to its peers. The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance is typically relatively short-lived, with few funds consistently outranking their peers.

In five of the six reported equity fund categories and three of the four reported fixed income categories, not a single manager whose performance placed them in the top quartile for the 12-month period ending December 2018 managed to remain in the top quartile for the next four years (see Report 2 and Report 8).

Exhibit #1: Europe Persistence Scorecard: Year-End 2022

On the other hand, lowering the bar from the top quartile to the top half provides tentative evidence of persistence among a fraction of EUR-denominated fund categories. As Exhibit 1 illustrates, 10% of active funds in the High Yield Bond (EUR) category, 9% of active funds in the Global Equity category and 8% of active funds in the Eurozone Equity category were able to maintain their top-half status over five consecutive one-year periods.

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SPIVA - May 11, 2023

U.S. Persistence Scorecard Year-End 2022

Craig Lazzara

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Grace Stoddart

Quantitative Associate, Index Investment Strategy

S&P Dow Jones Indices

Summary

Strong theoretical arguments and extensive empirical data support the expectation that most active managers should underperform most of the time. But most active managers are not all active managers, and most of the time is not all of the time. When we observe active management success, how can we tell whether it is the product of genuine skill or merely the result of good luck? One answer is that results produced by genuine skill are likely to persist, while those due to luck are likely to prove ephemeral.

The Persistence Scorecard is designed to address this question. Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods. Exhibit 1 illustrates the general point, using 10 years of return data for U.S. equity managers.

U.S. Persistence Scorecard Year-End 2022: Exhibit 1

Following Report 6, we consider the above-median managers in each fund category for the first five years, and then ask what fraction of the initial set of top managers repeated their above-median performance in the second five years. If performance were completely random, we would expect 50% of the winners in the first five years also to win in the second five years; if substantially more than 50% of the winners repeated in the second interval, that might be evidence of consistent skill. Results, however, fell well short of this mark.

Report Highlights

Results of the U.S. Persistence Year-End 2022 Scorecard are broadly consonant with those of prior years, despite 2022’s relatively benign environment for active U.S. managers. A declining market, the underperformance of mega-cap stocks, record sectoral spreads and above-average dispersion all militated in favor of active management, and yet 51% of large-cap U.S. equity funds lagged the S&P 500^®. That most active managers underperformed in what might have been a favorable milieu helps explain why consistent value added, while much desired, is seldom observed.

− Only 5% of the above-median large-cap active equity funds in calendar year 2020 remained above median in each of the two succeeding years. (If outperformance were purely random, we would expect a 25% repeat rate.) We see similar results for other fund categories (see Report 1).

− Of 2020’s top quartile large-cap funds, none continued in the top quartile for the next two years (versus 6.25% random expectation). These results were echoed in other fund categories (see Report 1).

− Consistent value added was just as elusive as consistently good peer group rankings. Outperformance by active managers in 2020 did not predict outperformance in the two subsequent years (see Report 1b).

− Results for active fixed income managers were somewhat better than for their equity counterparts, although still typically below the level suggested by chance (see Report 7).

− We continue to find evidence of persistence at the unfavorable end of the distribution. For example, 28% of all fourth quartile U.S. equity funds (based on 2012-2017 performance) were merged or liquidated within the next five years. The comparable figure for top quartile funds was only 10%. Results for active fixed income funds were similar (see Reports 5 and 11).

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