Persistence Scorecard: March 2019

IN THIS LIST

Persistence of Australian Active Funds Year-End 2018

Risk-Adjusted SPIVA^® Scorecard Year-End 2018

SPIVA^® Canada Year-End 2018

Persistence Scorecard: Latin America April 2019

SPIVA - Jul 15, 2019

Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

SUMMARY OF RESULTS

One key measure of successful active management lies in the ability of a manager or a strategy to outperform their peers repeatedly. Consistent success is the one way to differentiate a manager’s luck from skill.
The S&P Persistence Scorecard shows that few funds consistently outperformed their peers; 11.4% of domestic equity funds remained a top-quartile fund over the three-year period ending March 2019.
Smaller-cap equity funds recorded better performance persistence compared with results from six months prior; 23.3% (versus 7.7%) and 13.7% (versus 4.0%) of small- and mid-cap funds, respectively, remained in the top quartile during the three-year period ending March 2019.
The ability of top-performing funds to maintain their status typically fell over longer horizons. For example, zero large-, mid-, or multi-cap funds maintained their top-quartile status at the end of the five-year measurement period.

Top-performing funds were more likely to become the worst-performing funds than vice versa over the five-year horizon. While 15.3% of bottom-quartile domestic equity funds moved to the top quartile, a greater percentage (31.5%) of top-quartile funds moved to the bottom quartile during the same period.
Fourth-quartile funds were most likely to be merged or liquidated in nearly every category. This supports the view that underperformance typically precedes a fund’s closure.
Top-quartile mortgage-backed securities funds offered the best performance persistence among fixed income funds; 38.5% maintained their status during the three-year period ending March 2019.
A turnaround in the bond market’s outlook appeared to wrong-foot many top-quartile fixed income managers. While many top performers—as of March 2017—maintained their status the following year, there was a dramatic fall in persistence after March 2018.
Over longer horizons, the majority of fixed income categories showed no persistence. Investment-grade intermediate funds (2.1%) and general municipal debt funds (10.53%) offered the exceptions over the five-year horizon.

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SPIVA - Jun 11, 2019

Persistence of Australian Active Funds Year-End 2018

Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

EXECUTIVE SUMMARY

While comparing active funds against respective benchmark indices is a typical practice to evaluate their performance, persistence is an additional test that can reveal fund managers’ skills in different market environments.
In this report, we measure the performance persistence of active funds that outperformed their peers and benchmarks over consecutive three- and five-year periods, and we analyze their transition matrices over subsequent periods.

Overall results suggested only a minority of Australian highperforming funds persisted in outperforming their respective benchmarks or consistently stayed in their respective top quartiles for three or five consecutive years. Among top-quartile funds, 9.7% and 2.2% consistently maintained top-quartile rankings over consecutive three- and five-year periods, respectively. Top-quartile funds in the Australian Bonds fund category had the lowest turnover over both periods.
The transition matrix, which tracks the trajectory of funds in each quartile, suggested that top-quartile funds in the Australian Bonds fund category had the highest persistence, while Australian Equity Mid- and Small-Cap funds had the least persistence over two nonoverlapping three- and five-year periods.
Of outperforming funds, 6.5% and 1.3% consistently beat their benchmarks consecutively over three and five years, respectively. The Australian Equity A-REIT category had the highest persistence in terms of its outperforming funds (15.8%) over three consecutive years, but no fund categories showed high persistence in their outperforming funds over five consecutive years.
Among Australian funds that outperformed their benchmarks, only 16.8% and 21.8% managed to outperform over two successive three- and five-year periods, respectively.

MEASURING PERFORMANCE PERSISTENCE OF AUSTRALIAN ACTIVE FUNDS

Research suggests that actively managed winning streaks are often short lived. Twice a year, S&P Dow Jones Indices releases the Persistence Scorecard, which tracks the performance consistency of U.S. actively managed funds over consecutive years. We have consistently observed that relatively few U.S. active funds can stay at the top for years. In this report, we use similar matrices to measure the persistence of Australian active funds that outperform their benchmarks and their peers over threeand five-year periods. Our study follows the fund categories and benchmarks defined in the SPIVA^® Australia Scorecard, a biannual report that tracks the number of active Australian funds that beat their comparable benchmarks over short- and long-term horizons.

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SPIVA - Jun 05, 2019

Risk-Adjusted SPIVA^® Scorecard Year-End 2018

Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

SUMMARY

Risk and return are two sides of the same coin. Beyond relative performance of funds, market participants are also interested in the risks taken to achieve those returns. This motivated us to examine the performance of actively managed funds on a risk-adjusted basis.

The Risk-Adjusted SPIVA Scorecard measures the performance of actively managed funds against their benchmarks on a risk-adjusted basis, using net-of-fees and gross-of-fees returns. We use return/volatility ratios to evaluate performance. Volatility is computed by taking the standard deviation of monthly returns. Our goal is to establish whether actively managed funds are better at risk management than passive indices, using net-of-fees and gross-of-fees returns.

After adjusting for risk, the majority of actively managed domestic funds in all categories underperformed their benchmarks, on a net-of- fees basis, over mid- and long-term investment horizons.

Risk-Adjusted SPIVA Scorecard Year-End 2018: Exhibit 1

Although the risk-adjusted performance of active funds improved compared with their benchmarks on a gross-of-fees basis, real estate funds (over the five-year period) was the only category that generated a higher ratio than the benchmark. Overall, most active domestic equity managers in most categories underperformed their benchmarks, on a gross-of-fees basis.

The majority of international equity funds also generated lower risk-adjusted returns than their benchmarks, when using net-of-fees returns. International Small-Cap Funds were the only category that outperformed the benchmark on a risk-adjusted basis over the 10-year period, on a gross-of-fees basis.

When using net-of-fees returns, the majority of actively managed fixed income funds underperformed across all three investment horizons on a risk-adjusted basis. The exceptions were Investment-Grade Long Funds and Loan Participation Funds (over the 5- and 10-year periods), as well as Government Long Funds and California Municipal Debt Funds (over the 10-year period).

Unlike their equity counterparts, most fixed income funds outperformed their respecitve benchmarks gross of fees. This highlights how the role of fees in fixed income fund performance was especially critical. More active fixed income managers underperformed the benchmark on a risk- adjusted basis over the long term (15 years) than in the intermediate term (5 years).

Asset-weighted return/risk ratios of active managers were higher than the equal-weighted ratios, indicating that larger firms have taken on better-compensated risk than smaller ones. When comparing average ratios against their benchmarks, all domestic equity categories had lower ratios over all investment horizons when they were equally weighted on a net-of-fees basis. However, asset-weighted ratios of Real Estate Funds (over the 5-, 10-, and 15-year periods), Large-Cap Value Funds (over the 10- and 15-year periods), Mid-Cap Growth Funds (over the 5-year period), and Mid- Cap Value Funds (over the 10-year period) were higher than the benchmarks.

Looking at gross-of-fees versus net-of-fees returns, most fund categories produced higher return/risk ratios than their benchmarks if they were asset-weighted on a gross-of-fees basis. However, their outperformance diminished quickly once fees were accounted for, especially in domestic equity and international equity funds.

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SPIVA - Apr 29, 2019

SPIVA^® Canada Year-End 2018

Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

SUMMARY

2018 was a topsy-turvy year for global equity markets, and Canadian equities were no exception. After trade wars weighed on sentiment, sustained low unemployment and strong job creation initially drove a Canadian recovery. But YTD gains were wiped off many Canadian equity benchmarks in Q4 2018; renewed pessimism over the economy and declining oil prices provided headwinds.
The S&P/TSX Composite (-8.89%) was led lower by smaller-cap names as the S&P/TSX Completion (-12.85%) declined. Both indices finished 2018 with their worst calendar-year performance since 2008. Canada’s largest companies fared slightly better, but the S&P/TSX 60 (-7.58%) still fell.
Amid the market gyrations, more than 75% of Canadian active equity managers underperformed their benchmarks across all categories in 2018. This highlights the fact that heightened market volatility does not necessarily lead to outperformance by active managers.

SPIVA Canada Year-End 2018: Exhibit 1

Canadian Small-/Mid-Cap Equity fund managers found it particularly difficult to navigate 2018’s market turbulence, as 80% of all small- and mid-cap managers lagged the S&P/TSX Completion’s plunge.
Overall, roughly three in four Canadian Equity managers underperformed the S&P/TSX Composite; the potential to select among Canadian large-cap stocks did not significantly improve relative performance figures.
2018 was a tough year for Canadian Dividend & Income Equity funds. After the majority outperformed in 2017, 65.22% lagged the S&P/TSX Canadian Dividend Aristocrats® (-8.29%) in 2018. With long-term Canadian yields remaining below their long-term average, income-seeking investors may want to remember the long-term underperformance of active equity income funds as they formulate strategic asset allocation.
For the second consecutive year, Canadian Focused Equity funds posted the worst relative performance; 83.12% lagged the blended benchmark, which comprises the S&P/TSX Composite (50%), the S&P 500® (25%), and the S&P EPAC LargeMidCap (25%).
International Equity funds provided the best relative performance over the 12-month period ending Dec. 31, 2018; 44.44% of fund managers beat the S&P EPAC LargeMidCap, 18 percentage points higher than in 2017. However, the long-term picture remained largely unchanged; 95.24% lagged over the 10-year horizon.
U.S. equities continued to be a challenging asset class for managers to outperform; 78.57% of them underperformed the S&P 500 (CAD)’s 4.23% gain. A depreciation in the Canadian dollar helped the benchmark to overcome declines in U.S. equities.
Larger funds appeared to have greater difficulty beating their benchmarks; the asset-weighted returns were typically lower than the corresponding equal-weight returns. Canadian Dividend & Income Equity and U.S. Equity funds offered the exceptions across all time horizons.
The longer-term results continued to show that active equity funds found it difficult to beat their respective benchmarks. More than 9 in every 10 funds underperformed their respective benchmark over the 10-year period, and a similar story was evident over the five-year horizon.
Fund survivorship (or the lack of) played a large role in the long-term figures; more than half of all funds in the eligible universe 10 years ago have since been liquidated or merged.

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SPIVA - Apr 24, 2019

Persistence Scorecard: Latin America April 2019

Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

María Sánchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

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 a manager’s skill from pure 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. Due to increased data availability, the scorecard now contains five-year transition matrices.

SUMMARY OF RESULTS

Brazil

The inability for top-performing managers to replicate their success in the following years across all five categories. After four years, we observe that no managers remained in the top quartile for four of the five categories. Corporate bonds was the outlier, as 33% of managers remained in the top quartile by the end of 2018.
The five-year transition matrix in Exhibit 5 shows a mixed bag of results. For the three equity categories, when taking into account the large percentage of funds that were merged or liquidated in the second period, most top quartile managers in the first period were unable to repeat their success in the second period. For the fixed income categories, top-performing funds from the first period generally did well in the second period, as most were placed in the first or second quartile. However, this success is diluted when considering that 50% of first quartile corporate bond funds and 27% of first quartile government funds were merged or liquidated between the first and second periods.

Chile

We tracks the persistence of the top-performing funds in 2014 by counting how many remain in the top quartile over the subsequent four calendar years. After one year, 36% of funds remained in the top quartile, with that figure dropping to 9% (or one fund in total) by year two. By the third year, no funds remained in the top quartile, showing a clear lack of manager performance persistence when measured on a yearly basis.
The five-year transition matrix in Exhibit 5 shows that funds that were in the first quartile after the first five-year period did relatively well in the second five-year period, with most ranked in the top two quartiles. However, we also see that in total, half of the first quartile funds from the first period were merged or liquidated in the second period, which paints quite a different picture of overall quartile performance.

Mexico

Just 3 out of the 11 funds that were ranked in the top quartile in 2014 remained in the top quartile in 2015. Beyond 2015, none of the funds remained in the top quartile. If we relax the testing to the top half of managers in 2014, about 50% of the funds sustained top half performance in 2015. As time progressed, the percentage of managers remaining in the top half dropped, eventually hitting 0% by 2018.
For longer-term performance comparison, we look to the five-year transition matrix. Of the managers ranked in the first quartile in the first five-year period, 75% remained in the top two quartiles in the second period. Similarly, 63% of the second quartile managers in the first period remained in the top two quartiles in the second period. Funds ranked in the third and fourth quartiles in the first period generally repeated their poor performance in the second period.

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