- 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 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 transitioned over subsequent periods.
SUMMARY OF RESULTS
- Exhibit 2 highlights the inability of top-performing equity fund managers to consistently replicate their success in subsequent years - regardless of size focus, by the fourth year, no fund remained in the top quartile.
- Within fixed income, results in the government bond funds category were similar. However, the corporate bond funds category painted a slightly different picture; while the majority of managers were not able to maintain consistent outperformance for five years in a row, a noticeable 28% them were able to do so.
- The five-year transition matrix highlights that top-quartile equity (30%), large-cap equity (38%), and government bond (70%) funds that remained active had a higher likelihood of remaining in the top quartile in the second five-year period.
- Mid- and small-cap equity funds had a high frequency of closures - even for equity funds in the top quartile in the first five-year period, 30% 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 corporate bond funds fared particularly poorly, as no manager remained in the top quartile in the second five-year
- A minority of Chilean high-performing equity funds (10%) stayed in the top quartile for three consecutive years.
- Exhibit 2 demonstrates the lack of persistence by equity managers in Chile - just 9% of top-performing funds in the first 12-month period repeated their outperformance in the second period. None of them persisted in the subsequent 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 or to move to quartile two. However, a significant percentage of funds eventually shut down in the second period, especially the ones in the second and third quartile (50% and 60% respectively).
- No funds in the Mexican equity category managed to stay in the top quartile for three consecutive years.
- The five-year performance persistence test shows that top-quartile managers had difficulty replicating their outperformance in future years. After one year, just 20% of managers remained in the top quartile, and by year two, that percentage dropped to 10%.
- Exhibit 5 shows that top-quartile managers in the first five-year period were resilient and survived in the second five-year period, regardless of the quartile they ended in.
- As observed in the SPIVA® Latin America Year-End 2019 Scorecard, Mexico had a higher rate of survivorship than Brazil and Chile in the five-year period.