- 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
- 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%).
- 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.
- 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.