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 169 funds in seven categories that placed in the top quartile for the 12-month period ending December 2020, only 2 managed to remain in the top quartile for the next four years (see Report 2). We also find that in three of the seven fund categories examined, the percentage of Canada-domiciled actively managed equity funds staying in the top half over two consecutive five-year periods surpassed what would be expected from a random distribution (see Exhibit 1 and Report 6).
Report Highlights
2024 was a challenging year for Canadian active managers, with 88.7% of Canadian Equity funds underperforming the S&P/TSX Composite Index. In addition, sustaining top-tier performance proved to be a significant challenge, as observed from the following statistics on how Canadian funds performed relative to their peers:
- Maintaining a position in the top quartile proved challenging in most categories, but not impossible for some. Among top-quartile funds from the Canadian Focused Equity, Canadian Dividend & Income Equity and Canadian Small-/Mid-Cap Equity categories at the end of 2022, managers remained in the top quartile over two successive years at rates of 6.7%, 15.4% and 25.0%, respectively, compared to an expected 6.25% based on random chance (see Report 1).
- Over a five-year period, from the set of active funds that ranked in the top quartile in their categories at the end of December 2020, 13.1% of Dividend & Income funds managed to maintain that position over the subsequent four years, while no funds in any other category achieved the same feat (see Report 2).
- In four categories (Canadian Small-/Mid-Cap Equity, Global Equity, International Equity and U.S. Equity), slightly more than one-fourth of funds remained in the top quartile for two consecutive five-year periods, above the 25.0% that would be expected under a random distribution (see Report 5).
- Over two consecutive five-year periods, 8.0% of all the top half active equity funds across categories were merged or liquidated. Meanwhile, among the bottom half of all categories, 23.1% of funds were subsequently merged or closed (see Report 6).
- Generating sustained alpha was an unattainable goal for most, with a cross-category weighted average of only 2.3% of active equity funds that outperformed their benchmarks in 2022 managing to continue their outperformance across the following two years (see Report 1b).
