Summary
Should 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 relative performance. 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 or their benchmarks.
Performance persistence can be examined from several angles. One example is summarized for a range of European fund categories in Exhibit 1, which shows the proportion of actively managed equity and fixed income funds, respectively, whose one-year performance placed them in the top half within their respective category by December 2020, that maintained top-half annual performance in subsequent years. The chance of getting further consecutive “heads” from a fair coin flip after one initial “heads” is shown for purposes of comparison.
Report Highlights
2024 was another challenging environment for active equity managers in Europe and, as in previous years, persistence in outperformance was hard to find. The data suggests either that persistence was statistically rare or that, somewhat surprisingly, over some time periods, an opposite dynamic may have been more prevalent: leading funds often became laggards, while lagging funds often became leaders. However, not all the results were as counterintuitive. Consistent with previous editions of this Persistence Scorecard, over all examined time horizons, poor relative performance did correlate with an increased frequency of subsequent fund closures.
Highlighting selected characteristics of the data in the subsequent tables, Exhibit 2 illustrates the frequency with which active equity fund relative performance was maintained or changed over two discrete three-year periods ending December 2021 and December 2024, respectively. More precisely, it shows the frequency with which funds either moved from one quartile ranking within their category to another ranking (or stayed the same, or were liquidated; see Report 3.) The highest bar in Exhibit 2 shows a relatively high proportion of funds that moved from the top quartile of performance in the first three-year period to the lowest quartile in the subsequent three-year period. For those that survived from the lowest initial quartile of performance, a degree of mean reversion in performance is also clearly visible: the lightest-shaded bars decrease in a near-linear fashion from first to last quartile of performance in the second period. The higher frequency of mergers or liquidation among funds whose prior performance was poorer is illustrated in the right-most datapoints.
