Our widely followed SPIVA® Canada Scorecard repeatedly shows that most Canadian active managers underperform their benchmarks most of the time. However, if an active 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 Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers’ success. The inaugural Canada Persistence Scorecard shows that, regardless of asset class or style focus, few Canadian fund managers have consistently outperformed their peers.
For example, across all seven categories we track, none of the equity funds in their category's top quartile in 2015 maintained that status annually through 2019. If we consider funds in the top half of 2015's performance distribution, in six of the seven categories fewer than 5% of funds maintained their performance over the next four years. Coin flippers had higher odds of success.
Lengthening the horizon to consider performance over two consecutive five-year periods, the top-quartile domestic equity funds of 2010-2014 had little luck maintaining their top-quartile status during the 2015-2019 period. Only 30% of them managed to beat the median while 23% ended up in liquidation or had a style change.
The dismal persistence of performance across the past five years deserves a special note. Looking at Canadian Equity and Canadian Dividend & Income Equity funds, none of the top quartile funds of 2015 managed to make it into the top quartile for 2016. This may reflect the difficulty of market timing during extreme market swings: the S&P/TSX Composite Index was down 8.3% in 2015 before gaining 21.1% in 2016. As such, funds within a category that were more defensively positioned may have outperformed their peers in 2015, but did not pivot in time to make the most of 2016's gains.
The transition matrices evaluate performance over longer periods, and reinforce the idea that performance is inconsistent. The top half of Canadian Equity and Global Equity funds of 2014-2016 had a barely better than even chance (52%) of remaining in the top half over the 2017-2019 period. In the other five categories, the odds of remaining in the top half were below 50%.
Similarly, a five-year transition matrix showed every category clustering between a 40%-55% probability of top half funds remaining in the top half.
Unsurprisingly, the one pattern that did hold across categories was the tendency of the poorest funds to close. Fourth-quartile funds were generally the most likely to merge or liquidate over the subsequent three- and five-year windows, with 71% of Canadian Focused Equity and 54% of Canadian Equity bottom quartile funds in the 2010-2014 period disappearing by 2019.
Similar to the U.S. Persistence Scorecard, style changes did not appear to be 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. Further calculation shows that, over a five-year period, Canadian Dividend & Income Equity funds had the highest percentage of style change (9%), with International Equity funds leading the way over a three-year period (5%).