Our widely followed SPIVA® Canada Scorecard has consistently shown that most Canadian active managers underperform their benchmarks most of the time. But, when an active manager outperforms, how do we know whether the result is a product of genuine skill or merely of good luck? One key is that genuine skill is likely to persist, while luck is random and can soon dissipate.
The Canada Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers' success. Historically, persistence reports have shown that, regardless of asset class or style focus, active management outperformance is typically short lived, with few funds consistently outranking their peers. While our latest report shows some improvement in persistence, it remains the case that historical good performance is not predictive of future good performance.
For example, Exhibit 1 shows that of the 277 funds that ranked in the top half of their respective style category during 2012-2016, just 48.4% remained in the top half for 2017-2021. Meanwhile, the most likely outcome for bottom-half funds was to shut their doors for good.
There was greater evidence of persistence during more recent years and when viewed at shorter intervals. In six of the seven categories tracked, more than 25% of the funds in the top half in 2019 maintained that status in 2020 and 2021, lending some credence to the idea of fund persistence. Leading the way were Global Equity and International Equity funds, with more than 35% of funds managing that feat (see Report 1).
Similarly, there were a total of 173 funds that ranked in the top quartile for their style category in 2017. Of those 173, 5 funds (2.9%) stayed in the top quartile annually through 2021. Viewed probabilistically, this is better than the (25%)4 = 0.39% that might be expected if fund performance were purely random. As such, while the Persistence Scorecard does not prove that fund performance is completely random, from a practical or decision-making perspective, it tends to reinforce the notion that choosing between active funds on the basis of previous outperformance could be a misguided strategy. Although analysis of funds in Canada suffers from small sample sizes, this may be reinforced by the observation that these five funds were all Global Equity or U.S. Equity funds, with the other five categories displaying no top-quartile persistence (see Report 2).
Transition matrices tell a similar story. Using three-year windows, four of the seven categories show greater than 50% of top-half funds from the 2016-2018 period remaining in the top half for 2019-2021. Switching to the five-year window, only in two categories did more than 50% of funds qualify for the top half for both the 2012-2016 and 2017-2021 periods (see Reports 4 and 6).Unsurprisingly, the one pattern that did hold across categories was the tendency of the poorest-performing funds to close. Third- and fourth-quartile funds were generally the most likely to merge or liquidate over the subsequent three- and five-year windows, led by the 55% of Canadian Focused Equity bottom-quartile funds in the 2012-2016 period that disappeared by 2021 (see Reports 3 and 5).
Style changes did not appear to be correlated with fund performance. Top, middle and bottom performers within a category generally had similar chances of style drift over the three- and five-year periods. Over a five-year period, Canadian Dividend & Income Equity funds had the highest percentage of style change (7.3%), with Canadian Small-/Mid-Cap Equity funds leading the way over the three-year period (8.1%, see Reports 3 and 5).
