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Canada Persistence Scorecard: Mid-Year 2021

U.S. Persistence Scorecard Mid-Year 2021

SPIVA® MENA Scorecard

SPIVA® Europe Mid-Year 2021

SPIVA Canada Mid-Year 2021

Canada Persistence Scorecard: Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Berlinda Liu

Director, Global Research & Design

Our widely followed SPIVA® Canada Scorecard has consistently shown that most Canadian active funds underperform their benchmarks most of the time. However, if a manager beats a benchmark, how do we know whether the result is a product of genuine skill or merely of good luck? 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. It shows that regardless of asset class or style focus, active management outperformance is typically short lived, with few funds consistently outranking their peers.

For example, many top-quartile funds over the 12-month period ending June 2019 were able to repeat their performance over the next year, led by the 60% of Canadian Focused Equity funds that did just that. But by June 2021, the crosscurrents of the pandemic and recovery blew even those high flyers off course, with just 6.7% staying in the top quartile. In fact, in four of the seven categories tracked, no funds remained in the top quartile annually from June 2019 through June 2021 (see Report 1).

Canada Persistence Scorecard Mid-Year 2021 - Exhibit 1

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U.S. Persistence Scorecard Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Berlinda Liu

Director, Global Research & Design

SUMMARY

Should investment results be attributed to skill or luck? Genuine skill is 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 or to its benchmark. The Persistence Scorecard shows that regardless of asset class or style focus, active management outperformance is typically short-lived, with few funds consistently outranking their peers or benchmarks.

Recent years have blessed (or cursed) financial markets with plenty of volatility and narrative regimes. From a slow interest-rate-hiking cycle through the chaotic drawdown of the initial COVID-19 pandemic lockdowns,to a market powered by large technology companies and later extending to other sectors as the world re-emerged, this environment provided an excellent test of true fund management skills and adaptivity.

Sadly, what worked in one period was unlikely to persist in the next. Exhibit 1 shows that the top quartile funds in the 12-month period ending in June 2019 continued to succeed over the next year—perhaps because many of the winners of the late pre-pandemic expansion were often the same companies that benefited the most immediately following the lockdown. However, as the economy continued to recover, the rest of the market caught up, and those superstar funds quickly reverted to the mean. Within two years, a mere 4.8% of these June 2019 domestic equity winners remained in the top quartile (see Report 1a).

U.S. Persistence Scorecard Mid-Year 2021 - Exhibit 1

Even expanding the definition of success to simply beating the median fund’s return, fewer than 27% of any equity category’s top-half funds in June 2019 managed to stay in the top half through June 2021 (see Report 1a).

Widen the time horizon to five years, and the picture looks even more bleak. Even in the best category for persistence, just 3.2% of multi-cap funds managed to stay in the top quartile for each year. Mid-cap funds were especially disappointing, with no funds accomplishing that feat (see Report 2).

Some statistically minded readers might note that these numbers are occasionally better than what would be expected if fund performance was randomly distributed. For example, the odds that a top-quartile fund in one year could remain in the top quartile for the next four consecutive years might be calculated as (25%)4 = 0.39%, and the 3.2% referenced above is substantially better than that. While the persistence report does not prove that fund performance is completely random, from a practical or decision-making perspective, it reinforces the notion that choosing between active funds on the basis of previous outperformance is a misguided strategy. After all, there remains a 96.8% chance that a top-quartile fund will not stay in the top quartile for the next four years.

Another way of evaluating performance persistence is by comparing fund performance against their benchmarks. We first identify funds that beat their benchmarks in the one-year period ending in June 2019, net-of-fees. We then examine whether these funds continue to outperform during each of the next two one-year periods. Our result shows that past outperformance did not typically help identify superior performing managers in the future.

For example, out of 819 large-cap funds, 244 (or 29.8%) managed to beat the S&P 500® in the 12- month period ending in June 2019. However, only 128 of those 244 (52.5%) were able to keep their positive alpha in the next 12 months. By the end of June 2021, only 30 (12.3%) succeeded in repeating their outperformance relative to the benchmark (see Report 1b).

Previous SPIVA U.S. Scorecards showed that 36.8% and 41.8% of all large-cap funds outperformed in the 12-month periods ending in June 2020 and June 2021, respectively. An investor choosing funds randomly might thus expect a 36.8% * 41.8% = 15.4% chance of picking a fund that would outperform for two consecutive years, higher than the 12.3% realized—reinforcing the notion that fund alpha is likely fleeting.

U.S. Persistence Scorecard Mid-Year 2021 - Exhibit 2

Unsurprisingly, the one pattern that did hold across equity funds was the tendency of the poorest-performing funds to close. Fourth-quartile funds were almost always the most likely to merge or liquidate over the subsequent three- and five-year windows, with 52% of the bottom-quartile mid-cap funds from the June 2011–June 2016 period disappearing by June 2021. In fact, closing their doors was the most likely outcome in four out of five equity categories for fourth-quartile funds in that period (see Report 5).

Style changes did not appear to be particularly correlated with fund performance. Top, middle, and bottom performers within a category all generally had similar chances of style drift over three- or five-year periods. Multi-cap funds had the highest percentage of style change, with 28% making a change over three years and 41% over five years (see Reports 3 and 5).

Fixed income funds showed similar results to equities, with pockets of one-year persistence decaying over longer periods. In 8 of the 13 categories considered, no top-quartile funds from June 2017 maintained that status annually through June 2021 (see Report 8).

Transition matrices showed slightly more evidence of fixed income fund persistence. Over the five-year horizon, in 6 of the 13 categories, 50% or more of top-quartile funds remained in the top quartile. However, there were only two categories with greater than 20 funds that qualified within each quartile, perhaps leading to small sample size effects (see Report 11).

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SPIVA® MENA Scorecard

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Andrew Innes

Head of EMEA, Global Research & Design

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Andrew Cairns

Director, Global Research & Design

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Alberto Allegrucci

Senior Research Analyst, Global Research & Design

S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active Funds (SPIVA) U.S. Scorecard in 2002.  The SPIVA MENA Scorecard measures the performance of actively managed MENA equity funds denominated in local currencies against the performance of their respective S&P DJI benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.

MID-YEAR 2021 HIGHLIGHTS

As the global economy bounced back from the COVID-19 crisis, oil income started to ramp up again for the Middle East and North Africa (MENA) countries.  With successful vaccination campaigns and effective fiscal policies and reforms, economies in the MENA region continued to recover.  Expectations of steady growth reflected onto stock market trends in the region during the first half of 2021.

MENA

  • The S&P Pan Arab Composite LargeMidCap Index outperformed 92.9% of MENA Equity funds during the first half to 2021. Although this percentage decreases when including the 2020 COVID-19 market crash, the long-term 10-year figure was consistent, at 92.7%.
    • Active fund managers performed similarly on a risk-adjusted basis, with 90.3% of funds unable to beat the benchmark over the three-year period. In the longer 10-year period, this percentage was the same as the absolute basis, at 92.7%.
    • Over the one-year period, the S&P Pan Arab Composite LargeMidCap Index return was 5.6 percentage points higher than that of MENA Equity funds (on an asset-weighted average basis). This difference narrowed to 0.6% over the 10-year period.
    • Only 41.5% of the funds analyzed within the MENA Equity fund category survived the 10-year period.

GCC

  • Equity funds focused on the Gulf Cooperation Council (GCC) region did not fare better, with 92.6% underperforming the S&P GCC Composite over the six-month period.
    • Analyzing the funds’ risk-adjusted performance did not improve the picture, as 96% of GCC Equity funds underperformed the benchmark over the same six-month period.
    • When measured on an asset-weighted basis, the funds trailed the S&P GCC Composite benchmark by 8.1 percentage points over the six-month period. The S&P GCC Composite increased by 24.5% over the same period and by 46.9% over the one-year period.
    • The benchmark outperformance continued over the long term, resulting in an asset-weighted outperformance of 1.6 percentage points annualized over 10 years.

Saudi Arabia

  • Saudi Arabia Equity funds did not keep their strong benchmark-relative outperformance observed in 2020. For the six-month period, 90.9% of Saudi Arabia Equity funds underperformed the S&P Saudi Arabia
    • Despite a remarkable 27.2% asset-weighted average return during the first half of 2021, Saudi Arabia Equity funds trailed the benchmark by 3.5 percentage points, on an asset-weighted average basis.
    • Over the longer 10-year period, the outcome of active managers improved by a small degree, with 63.6% underperforming the benchmark. On a risk-adjusted basis, even fewer, albeit a majority of 54.6%, active funds were beaten by the benchmark.

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SPIVA® Europe Mid-Year 2021

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Andrew Innes

Head of EMEA, Global Research & Design

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Andrew Cairns

Director, Global Research & Design

Contributor Image
Alberto Allegrucci

Senior Research Analyst, Global Research & Design

S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active Funds (SPIVA) U.S. Scorecard in 2002.  The SPIVA Europe Scorecard measures the performance of actively managed European equity funds denominated in euro (EUR), British pound sterling (GBP), and other European local currencies against the performance of their respective S&P DJI benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.

MID-YEAR 2021 HIGHLIGHTS

As COVID-19 disruptions lessened due to successful vaccination rollouts in Europe, the first half of 2021 was characterized by a bullish and low-volatile stock market.  In this period, active funds generally struggled to keep up with their benchmarks.  However, over the one-year timeframe, a larger percentage of active funds outperformed. 

  • The S&P Europe 350® outperformed 70.7% of active euro-denominated Europe Equity funds in the first half of 2021. This percentage was up from the 41.7% obtained in the first half of 2020, during which the pandemic first sent markets plummeting.  These figures could support the notion that active managers may perform relatively better in uncertain times. 

  • Accordingly, the one-year period outperformance for the same benchmark—which includes the uncertainty of the post-COVID-19 market crash—was down to 50.7%. Similar outperformance patterns between the six-month and one-year periods can be seen across most of the fund categories. 

  • The relatively better performance by active funds during 2020 was not sufficient to compensate for the long-term trend. Every fund category saw its benchmark outperform at least 50% of the funds in the 10-year period, with averages greater than 80%. 

  • The low market volatility experienced during the first half of 2021 affected fund performance dispersion as well. The interquartile range of the performance of Europe Equity funds was just 4.2%, whereas the same metric stood at 8.1% in 2020.  This highlights that active funds generally performed more similarly to their peers in the calmer market environment. 

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SPIVA Canada Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Berlinda Liu

Director, Global Research & Design

The Canadian market, like many of its counterparts around the world, soared upward during the past year despite the COVID-19 pandemic. The S&P/TSX Composite gained 33.9% for the 12-month period ending on June 30, 2021, and the smaller-cap names of the S&P/TSX Completion did slightly better, with a 35.3% gain.

Unlike many previous reports, where the performance of active funds has been similar across categories, at mid-year 2021 there was a wide spread of outcomes. For example, 60% of Canadian Equity funds and 98% of Canadian Dividend & Income Equity funds fell short of their respective benchmarks over the past 12 months. However, just 15% of Canadian Small-/Mid-Cap Equity and 23% of Canadian Focused Equity funds underperformed over the same timeframe (see Report 1).

Even for the most recent outperformers, however, the longer-term picture remains unfavorable. Canadian Focused Equity funds were the worst-performing category over the past 10 years, with 96% of funds failing to clear their hurdle rate. Canadian Small-/Mid-Cap Equity funds— technically the best-performing category over the past 10 years—had 62% of funds trailing the benchmark.

Exhibit 1

The level of out- and underperformance also showed wide spreads over the past year. On an equal-weighted basis, Canadian Small-/Mid-Cap Equity funds beat the S&P/TSX Completion by 10.7%. Larger funds tended to do a little worse than smaller funds, as the asset-weighted difference between these active funds and the benchmark narrowed down to 9.0%. On the other hand, Canadian Dividend & Income Equity funds trailed the S&P/TSX Canadian Dividend Aristocrats® Index by 12.9%, with little difference by size (see Reports 3 and 4).

Larger Canadian Equity funds (benchmarked against the S&P/TSX Composite) did better than their smaller counterparts. On an equal-weighted basis, these funds lagged by 1.7%, but on an asset-weighted basis, they actually surpassed the benchmark by 3.8%. Unfortunately, looking back over the past 10 years, these funds trailed the index by roughly 1% per year, regardless of weighting (see Reports 3 and 4).

Funds looking outside of Canada posted solid absolute returns, though they lagged their domestic-oriented peers and broadly failed to add value through active management. U.S. Equity, International Equity, and Global Equity funds posted similar annual returns on an asset-weighted basis of 24.4%, 22.3%, and 22.8%, respectively. However, the majority of these active managers (67%, 58% and 69%, respectively) still trailed their corresponding benchmarks over the past year (see Reports 1 and 4).

The SPIVA Scorecards' accounting for survivorship bias continues to provide a valuable caution for asset allocators. While more than 90% of funds stayed alive over the past year, 54% of all funds in the eligible universe 10 years ago have since been liquidated or merged. Global Equity funds were the most likely to survive after 10 years, with 65% still in business. Canadian Focused Equity funds were the least likely to survive, as just 38% managed to do so (see Report 2).

Exhibit 2

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