INTRODUCTION
- In the active versus passive investment debate, a manager’s ability to deliver consistently above-average returns is key. Persistence in performance 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 how their performance ranking changed over subsequent periods.
SUMMARY OF RESULTS
Brazil
- The percentage of Brazil Equity Funds and Brazil Large-Cap Funds top performers that remained in the top quartile after 12 months fell drastically compared with the previous report (from 33% to 13% and 33% to 19%, respectively), as shown in Exhibit 1.
- Exhibit 2 highlights the inability of top-performing equity fund managers to consistently replicate their success in subsequent years.
- Among fixed income funds, Brazil Government Bond Funds had similar results to Brazil Equity Funds. Brazil Corporate Bond Funds performed slightly different; while the majority of managers did not maintain consistent outperformance for five years in a row, a notable 21% of them did (see Exhibit 2).
- The five-year transition matrix (see Exhibit 5) highlights three categories: equity, large-cap equity, and government bond funds. The chance of a winning fund remaining in the top quartile after five one-year periods was higher than the chance of it liquidating.
- Half of the top-quartile funds in the Brazil Corporate Bond Funds category remained in the top quartile and the other half were merged or liquidated (see Exhibit 5).
Chile
- A majority of Chilean top-performing equity funds (56%) stayed in the top quartile for two consecutive years, but just 11% stayed the third year (see Exhibit 1).
- Exhibit 2 demonstrates the lack of persistence by equity managers in Chile—just 10% of top performing funds in the first 12-month period repeated their outperformance after three years. None of the top-performing funds persisted after five years.
- Top-quartile managers in the first period of the three-year transition matrix that maintained their top-quartile status in the second period were more likely to stay in the first quartile (44%) than to move to lower quartiles (see Exhibit 3).
- The five-year transition matrix showed a lack of resilience among managers in the second quartile, with 70% of Chile Equity Funds being merged or liquidated (see Exhibit 5).
Mexico
- Of the funds in the Mexico Equity Funds category, 17% stayed in the top quartile for three consecutive years (see Exhibit 1).
- The five-year performance persistence test (see Exhibit 2) shows that top-quartile managers had difficulty replicating their outperformance in subsequent years. For the first and second one-year periods, just 9% of managers remained in the top quartile, and by the third year, none of them remained.
- Exhibit 6 shows that top-half managers in the first five-year period were resilient; 93% of them survived in the second five-year period.
