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.
Only days into 2022, a sustained downturn hobbled global markets. In this challenging environment, and in comparison to previous years, fewer top-quartile actively managed funds maintained their ranking over consecutive periods. Among all Canadian domestic equity funds ranked in the top quartile of performance over 12 months ending June 2020, zero maintained a top quartile position for the next two years.
Exhibit 1 shows the proportion of Canadian Equity managers who were in the top half of peer rankings as of June 2018 and remained in the top half over the following four years relative to what could be expected under a random distribution.
Report Highlights
− While slightly more than expected actively managed domestic equity funds maintained their quartile ranking over a few 12-month periods, the persistence of outperformance relative to their peers declined significantly over the five-year period ending June 2022.
− None of the actively managed domestic equity funds with top-quartile performance over the 12-month period ending June 2020 were able to maintain top-quartile performance over the subsequent two 12-month intervals. Global Equity and U.S. Equity similarly had no funds that maintained top-half performance over three 12-month periods. The only exception was International Equity, with 12% of funds staying in the top quartile over three consecutive 12-month intervals.
− 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 months ending June 2018, not a single fund remained in the top quartile through each of the subsequent one-year periods ending in June 2022.
− Over discrete five-year periods, a greater-than-expected proportion of funds in two domestic equity categories maintained relative outperformance. If performance was 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 that an unweighted average of 33% of top-quartile Canadian Equity and 32% of top-quartile Canadian Focused Equity funds remained in the top quartile for the two consecutive five-year periods.
− 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 domestic equity categories, the highest rate of style changes (14%) occurred in Canadian Dividend and Income Equity funds in the first quartile. With the exception of fourth-quartile Canadian Small/Mid Cap Equity funds, all other lowest-quartile funds changed styles at an equal or lesser rate than higher quartiles.
