In This List

SPIVA® U.S. Mid-Year 2020

SPIVA® Institutional Scorecard Year-End 2019

Canada Persistence Scorecard: Year-End 2019

U.S. Persistence Scorecard Year-End 2019

Australian Persistence Scorecard: Year-End 2019

SPIVA® U.S. Mid-Year 2020

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

SUMMARY

Drastic volatility hit the U.S. stock market in the first half of 2020. The S&P 500® declined by 3.1%, with negative returns also posted by the S&P MidCap 400® (-12.8%) and the S&P SmallCap 600® (-17.9%).

The S&P 500 reached an all-time high on Feb. 19, 2020, followed by a rapid 33.8% drop through March 23, 2020, as pandemic-driven restrictions suppressed economic activity. In April, stocks rebounded and the S&P 500 posted its best monthly return since January 1987. Encouraged by government stimulus programs and the expectation of economic reopening, the stock market continued its recovery in May and June.

In 11 out of the 18 categories of domestic equity funds, the majority of funds continued to underperform their benchmarks. For example, 67% of domestic equity funds lagged the S&P Composite 1500® during the one-year period ending June 30, 2020. Additionally, the majority of large-cap (63%) and multi-cap (65%) funds lagged their benchmarks. In contrast, mid-cap and small-cap active funds performed relatively better. Approximately 56% of mid-cap and 53% of small-cap active managers outperformed their benchmarks for the one-year period (see Exhibit 1).

Domestic Equity Funds Underperforming Benchmarks in Trailing One-Year Period

Growth funds led across all capitalization segments in the one-year period; 74% of large-cap growth, 83% of mid-cap growth, and 89% of small-cap growth funds beat their benchmarks. However, their recent success was not enough to offset previous underperformance; 92% of large-cap growth, 74% of mid-cap growth, and 75% of small-cap growth funds underperformed over the past 15 years.

Value funds continued to lag their benchmarks over all time horizons; 73% of large-cap value, 59% of small-cap value, and 91% of multi-cap value funds underperformed their benchmarks over the past year. Mid-cap value funds were the only exception, with 62% outperforming the S&P MidCap 400 Value for the one-year period. For all investment horizons longer than three years, however, more than two-thirds of value funds across all capitalization segments underperformed their benchmarks.

Despite divergent results over the one-year horizon, both growth and value funds underperformed their benchmarks over the past decade. Large-cap (growth 82%, value 86%), mid-cap (60%, 81%), and small-cap (57%, 90%) all delivered painful results.

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SPIVA® Institutional Scorecard Year-End 2019

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

SUMMARY

The SPIVA Institutional Scorecard extends the S&P Indices Versus Active (SPIVA) U.S. Scorecard to consider institutional accounts in addition to the mutual funds.  We also examine the impact of fees on both account types.

Overall, underperformance among institutional equity accounts was not meaningfully different from that reported for mutual funds.  For example, 79% of large-cap institutional accounts and 82% of large-cap mutual fund managers underperformed the S&P 500® on a gross-of-fees basis over the past 10 years.  Net-of-fees, underperformance by both fund types increased by approximately 7% (see Exhibit 1).

Exhibit 1

Gross-of fees, institutional accounts had a better chance of outperforming their benchmarks than their mutual fund counterparts in 16 of the 17 domestic equity fund categories tracked.  Nonetheless, the majority of institutional accounts across all equity fund categories underperformed over the past 10 years, ranging from a high of 87% of multi-cap core funds to a low of 59% of mid-cap growth funds.

Among mutual funds, active international equity managers showed greater differences between the gross- and net-of-fees relative performance figures than their domestic fund peers.  No such notable difference between categories was observed among institutional equity accounts.

Institutional fixed income funds typically performed better than their benchmarks, gross-of-fees, compared with their mutual fund counterparts.

For fixed income funds, fees had the greatest impact on performance in the emerging markets debt space.  While 37% of institutional emerging markets hard currency funds failed to outperform the benchmark over the past 10 years gross-of-fees, 68% did so net-of-fees.  On the mutual fund side, however, the impact of fees was even higher.  Emerging markets debt funds suffered a change of 43 percentage points, from 57% underperforming the benchmark gross-of-fees to a full 100% of funds once fees were taken into account.

Focusing on just 2019, outperformance statistics of institutional accounts varied by market-cap segments, perhaps due to spreads in the benchmark returns.  While 63% of large-cap funds fell short of the S&P 500’s 31.5% return, only 29% and 31% of the mid-cap and small-cap funds underperformed the S&P MidCap 400® (26.2%) and S&P SmallCap 600® (22.8%), respectively, perhaps reflecting fund managers' proclivity for hidden style drift.

Mid-cap growth funds offered the best relative performance among equity categories in 2019; an impressive 85% outclassed the S&P MidCap 400 Growth’s 26.3% gain.

The majority of institutional international equity fund managers underperformed in all four categories tracked over the past 10 years, although 64% of emerging markets funds did surpass the S&P/IFCI Composite in 2019.

Performance by institutional fixed income managers relative to their benchmarks over the past decade was mixed, as the majority of funds beat their benchmarks in 9 out of 17 categories.  However, they had a relatively strong 2019, with the majority of funds outperforming in 13 of 17 categories.

Emerging markets local currency funds were the best category for outperformance, with 88% topping the benchmark in 2019.  However, their impressive 2019 performance did not make up for an otherwise miserable decade, over which just 16% of funds outperformed, the worst of any fixed income category.  Municipal funds had the worst showing of 2019, with 72% of managers failing to match the S&P National AMT-Free Municipal Bond Index.

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Canada Persistence Scorecard: Year-End 2019

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

Our widely followed SPIVA® Canada Scorecard repeatedly shows that most Canadian active managers underperform their benchmarks most of the time. However, if an active 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 Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers’ success. The inaugural Canada Persistence Scorecard shows that, regardless of asset class or style focus, few Canadian fund managers have consistently outperformed their peers.

For example, across all seven categories we track, none of the equity funds in their category's top quartile in 2015 maintained that status annually through 2019. If we consider funds in the top half of 2015's performance distribution, in six of the seven categories fewer than 5% of funds maintained their performance over the next four years. Coin flippers had higher odds of success.

Lengthening the horizon to consider performance over two consecutive five-year periods, the top-quartile domestic equity funds of 2010-2014 had little luck maintaining their top-quartile status during the 2015-2019 period. Only 30% of them managed to beat the median while 23% ended up in liquidation or had a style change.

The dismal persistence of performance across the past five years deserves a special note. Looking at Canadian Equity and Canadian Dividend & Income Equity funds, none of the top quartile funds of 2015 managed to make it into the top quartile for 2016. This may reflect the difficulty of market timing during extreme market swings: the S&P/TSX Composite Index was down 8.3% in 2015 before gaining 21.1% in 2016. As such, funds within a category that were more defensively positioned may have outperformed their peers in 2015, but did not pivot in time to make the most of 2016's gains.

The transition matrices evaluate performance over longer periods, and reinforce the idea that performance is inconsistent. The top half of Canadian Equity and Global Equity funds of 2014-2016 had a barely better than even chance (52%) of remaining in the top half over the 2017-2019 period. In the other five categories, the odds of remaining in the top half were below 50%.

Similarly, a five-year transition matrix showed every category clustering between a 40%-55% probability of top half funds remaining in the top half.

Unsurprisingly, the one pattern that did hold across categories was the tendency of the poorest funds to close. Fourth-quartile funds were generally the most likely to merge or liquidate over the subsequent three- and five-year windows, with 71% of Canadian Focused Equity and 54% of Canadian Equity bottom quartile funds in the 2010-2014 period disappearing by 2019.

Similar to the U.S. Persistence Scorecard, style changes did not appear to be 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. Further calculation shows that, over a five-year period, Canadian Dividend & Income Equity funds had the highest percentage of style change (9%), with International Equity funds leading the way over a three-year period (5%).

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U.S. Persistence Scorecard Year-End 2019

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Berlinda Liu

Director, Global Research & Design

SUMMARY

When an active manager beats a benchmark, how can we judge 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 soon dissipates. Therefore one key measure of active management skill is the consistency of a fund’s outperformance.

The Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers’ success. This report shows that, regardless of asset class or style focus, few fund managers have consistently outperformed their peers.

For example, only 3.84% of domestic equity funds in the top half of the distribution in 2015 maintained that status annually through 2019, significantly below what random chance would predict. Similarly, just 0.18% of the 2015’s top-quartile domestic equity funds maintained that performance over the next four years, again below random chance.

Lengthening the horizon to consider performance over two consecutive five-year periods, Exhibit 1 shows that the top-quartile domestic equity funds of 2010-2014 had little luck maintaining their top-quartile status for the 2015-2019 period.  In fact, the most likely outcome for a top-quartile fund was liquidation or style change (39% together).

U.S. Persistence Scorecard Year-End 2019 - Exhibit 1

Compared with our previous reports, persistence appeared to improve over shorter investment horizons. Of the top-quartile domestic equity funds in 2017, 37.17% managed to stay in the top quartile annually through 2019.  However, this persistence was inconsistent and decayed over time. For example, 61.34% of 2017’s top-quartile domestic equity funds were ranked in the top quartile for 2018.  Rewinding the clock two years, just 3.38% of 2015’s top-quartile funds maintained that status in 2016.

There were few patterns to be found among equity funds’ performance, as the random distribution of fund performance over various time frames covered large-, mid-, small-, and multi-cap focused funds.  One notable observation came from small-cap funds in the three-year period, as just 1.67% of 2014-2016 top-quartile funds remained in the top quartile for 2017-2019.

Unsurprisingly, the one pattern that did hold across equity funds was the tendency of the poorest funds to close. Fourth-quartile funds were generally the most likely to merge or liquidate over the subsequent three- and five-year windows, with nearly 38% of the bottom-quartile multi-cap funds of 2010-2014 disappearing by 2019.

Perhaps more surprisingly, style changes did not appear to be 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 31% making a change over three years and 40% over five years.

Fixed income funds showed similar results to equities, with rare pockets of one-year persistence and little evidence for consistent annual outperformance over longer periods. In 10 of the 13 categories considered, no top-quartile funds from 2015 maintained that status annually through 2019.

Transition matrices showed slightly more evidence of fixed income fund persistence.  Over the three-year horizon, the most likely outcome for top-quartile funds in 11 of the 13 categories was to remain in the top quartile.  In 10 of the 13 categories, this outcome occurred for 50% or more of top-quartile funds.  Similar results existed over the five-year window.  However, in many fixed income fund categories, fewer than 20 funds qualified within each quartile, perhaps leading to small sample size effects.

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Australian Persistence Scorecard: Year-End 2019

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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 showed only a minority of high-performing Australian 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, 14.1% and 1.0% consistently maintained top-quartile rankings over consecutive three- and five-year periods, respectively. Top-quartile funds in the Australian Bonds category had the highest performance persistence among all categories.
  • The transition matrix, which tracks the trajectory of funds in each quartile, also showed that top-quartile funds in the Australian Bonds category had the highest persistence, with more than 75% of funds showing performance persistence over two non-overlapping three- and five-year periods.
  • Over three and five consecutive years, 15.8% and 1.3% of outperforming funds consistently beat their benchmarks, respectively. The Australian Equity Mid- and Small-Cap funds had the highest persistence over three consecutive years, but no fund category showed persistent outperformance over five consecutive years.
  • None of the fund categories exhibited strong performance persistence over the two successive five-year periods, but funds that outperformed in the first five-year period tended to have a lower liquidation rate in the subsequent five years across all categories.

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