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Latin America Persistence Scorecard: December 2019

U.S. Persistence Scorecard: December 2019

SPIVA® Latin America Scorecard Mid-Year 2019

SPIVA® U.S. Mid-Year 2019

SPIVA® India Mid-Year 2019

Latin America Persistence Scorecard: December 2019

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Phillip Brzenk

Senior Director, Strategy Indices

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María Sánchez

Associate Director, Global Research & Design

INTRODUCTION

  • When it comes to the active versus passive debate, one key dimension is the ability of a manager to deliver above-average returns over multiple periods. The ability to consistently outperform is one way to differentiate skill from luck.
  • In this report, we measure the performance persistence of active funds in Brazil, Chile, and Mexico that outperformed their peers over consecutive three- and five-year periods. We also analyze their performance ranking transition matrices over subsequent periods.

SUMMARY OF RESULTS

Brazil

  • Exhibit 2 highlights the inability of top-performing equity fund managers to replicate their success in subsequent years—regardless of size focus, by the fourth year, no fund remained in the top quartile.

  • Fixed income painted a slightly different picture than equities. While the majority of managers were not able to maintain consistent outperformance for five years in a row, 28% of corporate bond managers and 8% of government bond managers were able to do so.
  • The five-year transition matrix highlights that top-quartile funds that remained active had a higher likelihood of remaining in the top quartile in the second five-year period than of moving down to the other quartiles for all-cap equity (29%), large-cap equity (38%), and government bond funds (54%).
  • However, funds in Brazil had a high frequency of closures—even for equity funds in the top quartile in the first five-year period, 38% were eventually merged or liquidated in the second five-year period. Thus, overall, a fund had a higher chance of shutting down than of remaining in the top quartile.
  • Top-quartile fund managers focused on mid- and small-cap equities fared particularly poorly, as no manager remained in the top quartile in the second five-year period—most funds moved to the bottom two quartiles (44% total) or shut down (44%).

Chile

  • Exhibit 2 demonstrates the lack of persistence by equity managers in Chile—just 27% of top-performing funds in the first 12-month period repeated their outperformance in the subsequent period. This rate dropped to 9% in the third period and to 0% in the fourth and fifth periods.
  • The five-year transition matrix shows top-quartile managers in the first period that remained live in the second period were more likely to stay in the first quartile than move to quartiles two to four. However, even for the top-performing quartile, a significant percentage of funds (44%) eventually shut down in the second period.

Mexico

  • The five-year performance persistence test shows that top-quartile managers had difficulty replicating their outperformance in future years. After one year, just 18% of managers remained in the top quartile, and by year two, the percentage dropped to zero.
  • Exhibit 5 shows that top-quartile managers in the first five-year period were more likely to move to the bottom quartile (38% of managers) in the second five-year period than to any other quartile. Just as many managers from the second- and third-quartile categories moved to the top quartile as the ones that remained at the top.
  • As observed in the SPIVA Latin America Scorecard, Mexico had a higher rate of survivorship than Brazil and Chile. The five-year transition matrix shows that all funds that ended up closing during the second period came from the worst-performing quartiles of the first period. This highlights that poor relative performance typically precedes a fund closing down.

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U.S. Persistence Scorecard: December 2019

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Berlinda Liu

Director, Global Research & Design

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Phillip Brzenk

Senior Director, Strategy Indices

SUMMARY OF RESULTS

  • The S&P Persistence Scorecard attempts to distinguish a manager’s luck from skill. One key measure of successful active management lies in the ability of a manager to outperform his peers consistently.
  • This report’s results show that, irrespective of asset class or style focus, few fund managers consistently outperformed their peers.
  • For funds categorized as top performers in September 2017, 47% maintained their top-quartile performance the subsequent year. However, there was a dramatic fall in persistence afterward—just 8% of domestic equity funds remained in the top quartile in the three-year period ending September 2019. This result (8%) is consistent with the notion that historical performance is only randomly associated with future performance.
  • Smaller-cap equity funds recorded lower persistence compared with results from six months prior—mid-cap persistence dropped to 7% from 14%, and small-cap funds sank to 11% from 23%.

  • An inverse relationship exists between the time horizon length and the ability of top performing funds to maintain their success. Less than 3% of equity funds in all categories maintained their top-quartile status at the end of the five-year measurement period. In fact, no large-cap fund was able to consistently deliver top-quartile performance by the end of the fifth year.
  • Report 3 shows that over 44% of top-quartile large-cap managers from the first three-year period continued to show top performance in the second three-year period—a figure higher than what would be expected at random. Top-quartile mid- (30%) and small-cap (18%) funds did not fare as well.
  • For the five-year transition matrix, 32% of top-performing equity funds in the first period remained in the top quartile in the second period. However, 20% of top-quartile funds also moved to the lowest quartile, and an additional 8% of funds were merged or liquidated, highlighting that it was almost as likely for a top-quartile fund to falter than it was to remain in the top quartile.
  • Fourth-quartile funds were most likely to be merged or liquidated across categories over the five-year horizon. This supports the view that underperformance typically precedes a fund’s closure.
  • Top-quartile mortgage-backed securities funds demonstrated the best performance persistence among fixed income funds; 23% of managers maintained their top-performing status during the three-year period ending September 2019. However, this is a decline from the results six months prior (38%).
  • Over longer horizons, most fixed income categories showed no persistence: Of the 13 fixed income categories, seven showed no managers remaining in the top quartile over the five-year horizon.

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SPIVA® Latin America Scorecard Mid-Year 2019

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Phillip Brzenk

Senior Director, Strategy Indices

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Antonio de Azpiazu

Managing Director, Head of Client Coverage Europe and Latin America

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María Sánchez

Associate Director, Global Research & Design

SUMMARY

The S&P Indices Versus Active (SPIVA) Latin America Scorecard reports on the performance of actively managed mutual funds in Brazil, Chile, and Mexico against their respective category benchmarks over the 1-, 3-, 5-, and 10-year time horizons.

Brazil

  • The multi-year equity bull market in Brazil, which began in 2016, continued this year, with the S&P Brazil BMI rising 16.4% during the first half of 2019. Mid- and small-cap companies (S&P Brazil MidSmallCap) led the way, up 21.1%, while large-cap companies (S&P Brazil LargeCap) lagged (returning 14.3%). For the 12-month period ending in June 2019, Brazilian equities returned 41.2%, with smaller-cap companies once again outpacing large caps (47.0% versus 38.9%).
  • With inflation figures within the target range set by the National Monetary Council for 2019, interest rates were left unchanged in the first half of the year. The stability in rates proved beneficial for fixed income markets in the first six months of the year, as corporates were up 5.9% (as measured by Anbima Debentures Index) and government bonds were up 7.9% (as measured by Anbima Market Index). For the one-year period ending June 2019, corporates gained 11.7%, while government bonds were up 15.9%.
  • Over all time horizons and fund categories, active managers in Brazil fared poorly relative to their respective benchmarks. Over the one-year period ending in June 2019, 70% of all equity managers underperformed the S&P Brazil BMI, with the figure increasing to 84% when measuring relative performance over the 5- and 10-year periods.
  • For the 10-year horizon, larger funds performed relatively better than smaller funds in four of the five categories when comparing average fund performance on an equal-weighted versus assetweighted basis.

Chile

  • Alongside lower-than-expected economic growth in the first half of the year, the Chilean equity market was relatively flat (-0.6%) in the first six months of 2019. Over the 12-month period ending in June 2019, the market declined 4.3%, as measured by the S&P Chile BMI.
  • The majority (64%) of active equity fund managers underperformed the S&P Chile BMI over the past one-year period, with the median fund underperforming the benchmark by 1.1%.
  • Longer time horizons paint a worse picture of fund performance, as 98% of funds underperformed the benchmark over the 10-year period. Perhaps not coming as a surprise due to the underperformance, funds in Chile have a poor survival rate—50% of all funds that were active at the beginning of the 10-year period were merged or liquidated as of June 2019.

Mexico

  • Despite weakened economic growth in Mexico, the equity market rebounded in the first half of 2019, with the S&P/BMV IRT increasing 5.6%. The downturn seen in most global equity markets in the fourth quarter of 2018 was reflected in one-year return of -6.7% as of June 2019.
  • Active managers were unable to repeat their relative success seen in the year-end 2018 report, when 58% of managers outperformed the benchmark. For the 12-month period ending in June 2019, 64% underperformed the S&P/BMV IRT, with a median underperformance of 1.3%. The longer the time horizon, the worse things got for managers, as 86% of funds underperformed the benchmark over the 10-year period.
  • Mexico not only saw the highest survival rate for equity funds in Latin America, but also some of the highest globally. All funds survived over the 12-month period, with the survival rate above 90% for the three- and five-year periods.

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SPIVA® U.S. Mid-Year 2019

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Berlinda Liu

Director, Global Research & Design

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Phillip Brzenk

Senior Director, Strategy Indices

After a tumultuous fourth quarter in 2018, the S&P 500® rebounded in the first half of 2019 to return 18.5%—the best performance for the first half of a year since 1997. The S&P MidCap 400® (18.0%) and the S&P SmallCap 600® (13.7%) also posted double-digit gains. For the 12-month period ending in June, the S&P 500 and the S&P Composite 1500® were up 10.4% and 9.3%, respectively. Over the same period, the S&P MidCap 400 gained a modest 1.4% while the S&P SmallCap 600 fell 4.9%. This performance divergence highlights the dominance of large-cap securities in driving the recent market performance. Cyclical sectors such as Information Technology (27.1%) and Consumer Discretionary (21.8%) led the charge in the first half of 2019, while Health Care (8.1%) and Energy (13.1%) lagged.

For the one-year period ending in June 2019, 71% of domestic equity funds underperformed the S&P Composite 1500, slightly more than the previous report’s 69%. Additionally, the majority of large-cap (70%) and multi-cap (72%) funds lagged their benchmarks. In contrast, mid-cap and small-cap active funds performed relatively better; approximately 64% of active managers in both categories beat their benchmarks for the one-year period.

Growth-style investing led the recovery in the first half of 2019, which led to growth outpacing value for the last 12 months. However, most domestic large-cap growth managers were unable to keep up with the performance of the S&P 500 Growth (12%) for the one-year period ending in June. In fact, compared with results from six months prior, a higher percentage of large-cap growth funds underperformed (going from 60% to 70%) by an equal-weighted average of 1.5%.

Unlike their large-cap counterparts, most mid- and small-cap growth managers found success; 88% of mid-cap growth managers beat the S&P MidCap 400 Growth (up 1.9%) and 85% of small-cap growth managers beat the S&P SmallCap 600 Growth (down 2.3%) for the one-year period ending in June 2019. The magnitude of outperformance was significant, as the equal-weighted average one-year returns of the mid- and small-cap growth categories were 11.5% and 5.3%, respectively—an excess of 9.6% and 7.6% relative to their respective category benchmarks. Fund size was not a factor, as results were similar using asset-weighted returns for each category. The outsized success of growth managers in the two smaller-cap categories and the divergence in returns observed across the size segments for the last year point to potential “size creep” into large-cap securities by those managers in order to boost returns.

Over longer-term horizons (10 and 15 years), at least 80% of active managers underperformed their respective benchmarks across all domestic equity categories.

The S&P 700, a barometer for international equities, rose over 14% in the first six months of 2019, despite continued trade tensions involving major world economies (U.S. and China, Brexit). The strong market returns did not translate to success for international equity managers, as the majority of international and emerging market funds in all categories underperformed their benchmarks for the one-year period ending in June 2019—72% of international funds lagged the S&P 700 and 55% of emerging market managers failed to beat the S&P/IFCI Composite.

For the first time since 2007, the U.S. yield curve inverted in March, as measured by the relative yields of the 3-month Treasury bill and 10-year Treasury bond. While the Fed refrained from cutting its target rate in the first half of 2019, the June meeting minutes showed increased concern for the U.S. economic outlook. Unsurprisingly, the minutes bolstered expectations for rate cuts in the second half of the year. The majority of fixed income active funds underperformed their benchmarks, with global income funds (at 44%) the lone exception. Of particular note, all government long funds and loan participation funds underperformed their respective benchmarks over the one-year horizon. This is in stark contrast to results from the report six months prior, when just 17% of government long funds and 57% of loan participation funds underperformed.

In the government and investment-grade fund categories, short- and intermediate-term funds did relatively better than those focused on the long end of the curve. The longer-term, 15-year figures show that most active fixed income managers underperformed their benchmarks.

Survival rates of funds remained low across all categories; 57% of domestic equity funds, 49% of international equity funds, and 52% of all fixed income funds were merged or liquidated over the 15-year horizon.

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SPIVA® India Mid-Year 2019

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Arpit Gupta

Senior Analyst, Global Research & Design

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Akash Jain

Associate Director, Global Research & Design

SUMMARY

  • 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 (SPIVA) U.S. Scorecard in 2002. Over the years, we have built on our experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.
  • The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, we studied the performance of three categories of actively managed equity funds and two categories of actively managed bond funds over the 1-, 3-, 5-, and 10-year periods ending in June 2019.
  • The S&P BSE 100 and S&P BSE 200 rallied in the first half of 2019. In the same period, active funds in the Indian Equity Large-Cap and Indian Equity Mid-/Small-Cap categories managed to recoup some lost ground by outperforming their respective benchmarks, while the bond categories noticed further underperformance against their respective benchmarks.
  • Benchmarks for both bond categories witnessed strong rebounds in the one-year period ending in June 2019, aided by the Reserve Bank of India softening policy rates. The S&P BSE India Government Bond Index and the S&P BSE India Bond Index returned 14.25% and 13.37%, respectively, in the one-year period ending in June 2019.

    • Indian Equity Large-Cap Funds: Over the one-year period, the S&P BSE 100 surged 9.79%, with 76.67% of funds underperforming the benchmark. In fact, across all the periods studied, the majority of actively managed large-cap equity funds in India underperformed the S&P BSE 100. Large-cap funds witnessed a low style consistency of 16.67% over the 10-year period and a low survivorship rate of 68.33%. The asset-weighted fund return was 85 bps higher than the equalweighted fund return over the 10-year period, and the return spread between the first and the third quartile breakpoints of the fund performance was 2.98% for the same period.
    • Indian ELSS: Over the one-year period, the S&P BSE 200 ended in the black, returning 8.24%, with 80.95% of funds underperforming the benchmark. Over the three- and five-year periods ending in June 2019, 83.33% and 51.35% of funds underperformed the benchmark, respectively. Over the 10-year horizon, the return spread between asset-weighted and equal-weighted returns was only 18 bps. The return spread between the first and the third quartile breakpoints of the fund performance was 3.20%.
    • Indian Mid-/Small-Cap Equity Funds: The benchmark for Indian Mid-/Small-Cap Equity funds, the S&P BSE 400 MidSmallCap Index, was down 6.68% during the one-year period ending in June 2019. Only 18.92% of the active funds underperformed the benchmark over the one-year period. Over the 10-year period, the survivorship rate and style consistency were low, at 64.37% and 26.44%, respectively. For the same period, the asset-weighted fund return was 22 bps higher than the equal-weighted fund return, and the return spread between the first and the third quartile breakpoints of the fund performance was 3.94%.
    • Indian Government Bond Funds: The S&P BSE Indian Government Bond Index returned 14.25% over the one-year period ending in June 2019. Over the 1-, 3-, 5-, and 10-year periods ending in June 2019, 76.92%, 73.17%, 84.62%, and 87.72% of the actively managed funds in this category lagged the benchmark, respectively. Over the 10-year period ending in June 2019, survivorship rate and style consistency were at 35.09% and 31.58%, respectively. For the same period, the asset-weighted fund return was 13 bps higher than the equal-weighted fund return, and the return spread between the first and the third quartile breakpoints of the fund performance was 1.83%.
    • Indian Composite Bond Funds: In the 12-month period ending in June 2019, the S&P BSE India Bond Index closed in the black with a gain of 13.37%. Across all the observed periods, more than 94% of the funds underperformed the benchmark. Over the 10-year period, survivorship rate and style consistency were at 73.42% and 67.09%, respectively. For the same period, the assetweighted fund return was 38 bps higher than the equal-weighted fund return, and the return spread between the first and the third quartile break points of the fund performance was 1.53%.
    • Average Fund Returns: In the one-year period ending in June 2019, the equal- and assetweighted returns of Indian ELSS and Indian Composite Bond fund categories were sharply lower than their respective benchmarks. In contrast, only the Indian Equity Mid-/Small-Cap category delivered higher equal- and asset-weighted average returns than its benchmark over the same period. Over the 10-year period, the largest outperformance relative to its benchmark was witnessed in the Indian Equity Mid-/Small-Cap category, as its asset-weighted return was 211 bps higher than its benchmark.
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