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Persistence Scorecard Latin America Mid-Year 2021

SPIVA Latin America Mid-Year 2021

SPIVA Japan Mid-Year 2021

Canada Persistence Scorecard: Mid-Year 2021

U.S. Persistence Scorecard Mid-Year 2021

Persistence Scorecard Latin America Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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María Sánchez

Associate Director, Global Research & Design

INTRODUCTION

A key dimension of any active versus passive debate is managers’ ability to consistently deliver above-average returns over multiple periods.  Persistence in performance is one out of many possible ways 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 transitioned over subsequent periods.

SUMMARY OF RESULTS

Brazil

  • Top performers in Brazilian fixed income fund categories showed better chances than equity categories of remaining in the top quartile over three years (see Report 1).

  • Report 2 highlights the inability of top-performing equity fund managers to consistently repeat success in subsequent years. The least persistent were Brazil Equity Fund managers—by the fourth year, just 3% of them remained in the top quartile and none by the fifth year.
  • The majority of Brazil Corporate Bond Fund managers did not maintain consistent outperformance for five years in a row; only 7% of them were able to persist. Brazil Government Bond Fund managers did not show better results; 2% of them delivered consistent outperformance for five years in a row (see Report 2).
  • The five-year transition matrix (see Report 5) highlights the Brazil Corporate Bond Funds category. The chance of a winning fund remaining in the top quartile after five one-year periods was lower than the chance of it liquidating.
  • More than half (59%) of the top-quartile funds in the Brazil Equity Funds category remained in first and second quartile over the five-year period (see Report 5).

Chile

  • Report 2 shows 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 five years.
  • In Report 3, we can observe that 13% of the top-quartile funds in the first period of the three-year transition matrix remained in the top-quartile after three years.
  • Funds in third quartile of the five-year transition matrix were more likely to be liquidated (78%) than to stay or move to lower quartiles (see Report 5).

Mexico

  • As observed in the SPIVA® Latin America Mid-Year 2021 Scorecard, Mexico had a higher rate of fund survivorship than Brazil and Chile in the three- and five-year periods. Reports 3, 4, 5, and 6 show that Mexican funds had a lower chance of being shut down than Brazilian and Chilean funds.
  • The five-year performance persistence test (see Report 2) shows that top-quartile managers had difficulty replicating their outperformance in subsequent years. After one year, just 27% of managers remained in the top quartile, and by the end of year two, none remained.
  • Report 5 shows that top-quartile managers in the first five-year period survived in the second five-year period; however, they were more likely to move to the fourth quartile than remain in the top.

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SPIVA Latin America Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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María Sánchez

Associate Director, Global Research & Design

SUMMARY

The S&P Indices Versus Active (SPIVA) Latin America Scorecard compares the performance of actively managed mutual funds in Brazil, Chile, and Mexico to their benchmarks over 1-, 3-, 5-, and 10-year periods.

Markets continued recovering during the first half of 2021. The recovery was accompanied by some inflationary pressures and, in turn, central banks increasing interest rates. Although volatility has dropped from 2020's closing levels, it is still above pre-pandemic levels in the three countries covered in this report. Despite this environment, the majority of active managers across categories failed to outperform, especially over longer periods.

SPIVA Latin America Mid-Year 2021 Graph 1

Brazil

  • The Brazilian equity market’s upward trend at year-end 2020 extended into the first half of 2021, although a little more moderately, with the S&P Brazil BMI gaining 6.74% YTD and 36.87% over the past 12 months (see Report 3). Large-cap and mid-/small-cap companies also recovered during the first half of 2021, returning 4.29% and 12.36%, respectively, as measured by the S&P Brazil LargeCap and S&P Brazil MidSmallCap. On the other hand, the National Monetary Council reversed the policy interest rates (Selic) trend by increasing it 225 bps, from 2.00% to 4.25%, in the first half of 2021.
  • Over the one-year period, most active fund managers underperformed their benchmarks in all categories: 83.06% of Brazil Equity Funds, 80.80% of Brazil Large-Cap Funds, and 59.09% of the Brazil Mid-/Small-Cap Funds underperformed their benchmarks. In addition, active managers from all categories fared poorly relative to their respective benchmarks over all periods observed, particularly in the mid-/small-cap category, where just 8.70% and 8.33% of managers were able to beat their benchmark over the 5- and 10-year periods, respectively (see Report 1).
  • The majority of active bond fund managers underperformed their benchmarks over all the periods observed. Moreover, in this report, we observed the worst survival rate for Brazil Corporate Bond Funds over the 5- and 10-year periods in history, with 25.00% and 29.79% surviving, respectively (see Report 2).

Chile

  • The continued 3.83% recovery seen in Chilean equities over the first half of 2021 led to a 9.38% return for the 12-month period ending in June 2021, as measured by the S&P Chile BMI.
  • The majority of active equity fund managers underperformed the S&P Chile BMI over all periods studied but especially over the longer time periods, with 92.50% and 97.78% of active funds underperforming the benchmark over the 5- and 10-year periods, respectively (see Report 1). Funds underperformed the benchmark by medians of 1.95% and 2.24% over the 5- and 10-year periods, respectively (see Report 5).
  • Smaller funds performed relatively better than larger funds over all observed periods on an equal-weighted basis (see Report 3) versus an asset-weighted basis; the greatest difference was in the 10-year period, at 104 bps, as asset-weighted funds posted 2.84% and equal-weighted funds posted -1.80% (see Report 4).

Mexico

  • The S&P/BMV IRT gained 15.46% over the first half of 2021, resulting in a 36.87% return for the past 12 months. The majority of active managers underperformed the S&P/BMV IRT over all periods observed, with the worst result over the 10-year period, with 88.89% of the funds underperforming their benchmark (see Report 1).
  • Median fund underperformance was 6.88%, 3.30%, 3.76%, and 2.39% for the 1-, 3-, 5-, and 10-year periods, respectively (see Report 5). Not even managers in the first quartile managed to outperform the benchmark in any period.
  • Despite the poor performance of the active managers in the first half of the year, the survival rates of active funds in Mexico were the highest of Latin America, at 100%, 93.62%, 90.70%, and 77.78% over the 1-, 3-, 5-, and 10-year periods, respectively (see Report 2); this marked five scorecards in a row for the three- and five-year periods.
  • Smaller funds performed relatively better than larger funds over all observed periods on an equal-weighted basis, especially over the one-year period, with 244 bps of difference (see Report 3).

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SPIVA Japan Mid-Year 2021

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Tim Wang

Senior Analyst, Global Research & Design

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Priscilla Luk

Managing Director, Global Research & Design, APAC

SUMMARY

  • S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since we first published the SPIVA U.S. Scorecard in 2002. Over the years, we have expanded the scorecard coverage into Australia, Canada, Europe, India, South Africa, Latin America, the Middle East and North Africa, and Japan.
  • The SPIVA Japan Scorecard reports on the performance of actively managed Japanese mutual funds against their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.
  • In this scorecard, we evaluated the returns of more than 774 Japanese large- and mid-/small-cap equity funds, along with more than 784 international equity funds investing in global, international, and emerging markets, as well as U.S. equities.

  • International equity markets posted stronger returns than the domestic equity market in the first half of 2021; however, a higher number of foreign equity funds underperformed their respective benchmark than domestic equity funds.
  • There was no consistent trend in the yearly active versus index figures, but we have consistently observed underperformance for the majority of Japanese active funds in most categories over the 10-year period.

Domestic Equity Funds

  • In the 12-month period ending June 2021, the S&P/TOPIX 150 and S&P Japan MidSmallCap posted strong gains of 30.40% and 22.96%, respectively. Over the same period, 58.1% and 26.1% of large- and mid-/small-cap equity funds underperformed their respective benchmarks, with average gains of 29.94% and 28.31%, respectively.
  • Over the 5- and 10-year horizons, 77.4% and 79.4% of Japanese large-cap funds underperformed the S&P/TOPIX 150, and they delivered lower equal-weighted average returns than the benchmark. In contrast, the percentage of underperforming funds in the Japan mid-/small-cap fund category was much smaller, and the equal-weighted average fund returns exceeded the S&P Japan MidSmallCap index return.
  • As of June 2021, 94.4% and 96.9% of Japanese large- and mid-/small-cap funds, respectively, survived during the one-year period, though the survivorship rates dropped to 62.8% and 67.8%, respectively, over the 10-year period.

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Canada Persistence Scorecard: Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Berlinda Liu

Director, Global Research & Design

Our widely followed SPIVA® Canada Scorecard has consistently shown that most Canadian active funds underperform their benchmarks most of the time. However, if a 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 Canada Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers' success. It shows that regardless of asset class or style focus, active management outperformance is typically short lived, with few funds consistently outranking their peers.

For example, many top-quartile funds over the 12-month period ending June 2019 were able to repeat their performance over the next year, led by the 60% of Canadian Focused Equity funds that did just that. But by June 2021, the crosscurrents of the pandemic and recovery blew even those high flyers off course, with just 6.7% staying in the top quartile. In fact, in four of the seven categories tracked, no funds remained in the top quartile annually from June 2019 through June 2021 (see Report 1).

Canada Persistence Scorecard Mid-Year 2021 - Exhibit 1

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U.S. Persistence Scorecard Mid-Year 2021

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Berlinda Liu

Director, Global Research & Design

SUMMARY

Should investment results be attributed to skill or luck? Genuine skill is likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s performance relative to its peers or to its benchmark. The Persistence Scorecard shows that regardless of asset class or style focus, active management outperformance is typically short-lived, with few funds consistently outranking their peers or benchmarks.

Recent years have blessed (or cursed) financial markets with plenty of volatility and narrative regimes. From a slow interest-rate-hiking cycle through the chaotic drawdown of the initial COVID-19 pandemic lockdowns,to a market powered by large technology companies and later extending to other sectors as the world re-emerged, this environment provided an excellent test of true fund management skills and adaptivity.

Sadly, what worked in one period was unlikely to persist in the next. Exhibit 1 shows that the top quartile funds in the 12-month period ending in June 2019 continued to succeed over the next year—perhaps because many of the winners of the late pre-pandemic expansion were often the same companies that benefited the most immediately following the lockdown. However, as the economy continued to recover, the rest of the market caught up, and those superstar funds quickly reverted to the mean. Within two years, a mere 4.8% of these June 2019 domestic equity winners remained in the top quartile (see Report 1a).

U.S. Persistence Scorecard Mid-Year 2021 - Exhibit 1

Even expanding the definition of success to simply beating the median fund’s return, fewer than 27% of any equity category’s top-half funds in June 2019 managed to stay in the top half through June 2021 (see Report 1a).

Widen the time horizon to five years, and the picture looks even more bleak. Even in the best category for persistence, just 3.2% of multi-cap funds managed to stay in the top quartile for each year. Mid-cap funds were especially disappointing, with no funds accomplishing that feat (see Report 2).

Some statistically minded readers might note that these numbers are occasionally better than what would be expected if fund performance was randomly distributed. For example, the odds that a top-quartile fund in one year could remain in the top quartile for the next four consecutive years might be calculated as (25%)4 = 0.39%, and the 3.2% referenced above is substantially better than that. While the persistence report does not prove that fund performance is completely random, from a practical or decision-making perspective, it reinforces the notion that choosing between active funds on the basis of previous outperformance is a misguided strategy. After all, there remains a 96.8% chance that a top-quartile fund will not stay in the top quartile for the next four years.

Another way of evaluating performance persistence is by comparing fund performance against their benchmarks. We first identify funds that beat their benchmarks in the one-year period ending in June 2019, net-of-fees. We then examine whether these funds continue to outperform during each of the next two one-year periods. Our result shows that past outperformance did not typically help identify superior performing managers in the future.

For example, out of 819 large-cap funds, 244 (or 29.8%) managed to beat the S&P 500® in the 12- month period ending in June 2019. However, only 128 of those 244 (52.5%) were able to keep their positive alpha in the next 12 months. By the end of June 2021, only 30 (12.3%) succeeded in repeating their outperformance relative to the benchmark (see Report 1b).

Previous SPIVA U.S. Scorecards showed that 36.8% and 41.8% of all large-cap funds outperformed in the 12-month periods ending in June 2020 and June 2021, respectively. An investor choosing funds randomly might thus expect a 36.8% * 41.8% = 15.4% chance of picking a fund that would outperform for two consecutive years, higher than the 12.3% realized—reinforcing the notion that fund alpha is likely fleeting.

U.S. Persistence Scorecard Mid-Year 2021 - Exhibit 2

Unsurprisingly, the one pattern that did hold across equity funds was the tendency of the poorest-performing funds to close. Fourth-quartile funds were almost always the most likely to merge or liquidate over the subsequent three- and five-year windows, with 52% of the bottom-quartile mid-cap funds from the June 2011–June 2016 period disappearing by June 2021. In fact, closing their doors was the most likely outcome in four out of five equity categories for fourth-quartile funds in that period (see Report 5).

Style changes did not appear to be particularly 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. Multi-cap funds had the highest percentage of style change, with 28% making a change over three years and 41% over five years (see Reports 3 and 5).

Fixed income funds showed similar results to equities, with pockets of one-year persistence decaying over longer periods. In 8 of the 13 categories considered, no top-quartile funds from June 2017 maintained that status annually through June 2021 (see Report 8).

Transition matrices showed slightly more evidence of fixed income fund persistence. Over the five-year horizon, in 6 of the 13 categories, 50% or more of top-quartile funds remained in the top quartile. However, there were only two categories with greater than 20 funds that qualified within each quartile, perhaps leading to small sample size effects (see Report 11).

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