Summary
Our SPIVA® Scorecards show that most active managers underperform most of the time, especially over the long term. But on the rare occasions when active managers do outperform, how do we know whether the outperformance was driven by skill or luck?
Skill is likely to persist, but luck is ephemeral. The Persistence Scorecard demonstrates that consistent outperformance, both relative to peers and versus the benchmark, is typically hard to find. Among top-quartile funds within all reported active domestic equity categories as of December 2020, not a single fund remained in the top quartile over the next four years (see Report 2).
The results are not much improved when lowering the bar from the top quartile to the top half. Exhibit 1 illustrates that the percentage of top-half actively managed domestic equity funds consistently remaining in the top half over a five-year period (see Report 2) was less than a random distribution would suggest, evidence that active outperformance, when it occurs, tends to be the result of luck rather than genuine skill.
Report Highlights
With dual headwinds of a rising market and mega-cap strength, 2024 was a challenging year for active managers, with 65% of all active large-cap U.S. equity funds underperforming the S&P 500®, worse than the 60% rate observed in 2023. Persistence of outperformance was fleeting, with a small fraction of actively managed equity funds able to maintain consistent outperformance relative to their peers over the three- or five-year periods ending in December 2024.
- None of the top-quartile large-cap funds from 2022 maintained their position in the top quartile for the subsequent two years, compared to an expected 6.25% based on random chance (see Report 1). Only 9% of the above-median large-cap active equity funds in calendar year 2022 remained above median in each of the two succeeding years. If outperformance were entirely random, we would expect a repeat rate of approximately 25% (see Report 1).
- Results further down the capitalization spectrum were notably worse than what was observed in 2023. Only 6% of top-quartile small-cap equity funds from 2022 maintained their status for the next two years, down from the 10% reported in 2023. Meanwhile, 18% of above-median small-cap funds stayed in the top half over the same period (see Report 1), down by half compared to the 36% reported for year-end 2023.
- Alpha persistence was fleeting, with a cross-category average of only 8.3% of active equity funds that surpassed the benchmark in 2022 able to consistently outperform their respective benchmarks over the subsequent two-year period (see Report 1b), down from the 12.8% reported last year.
- Results for active fixed income managers were generally better than for their equity counterparts, which is consistent with the trends noted among equities. A total of 17% of top-quartile Investment Grade Intermediate and 12% of High Yield funds in calendar year 2022 remained in the top quartile in each of the two succeeding years (see Report 7).
- Over consecutive five-year periods, in almost every category, the worst-performing quartile saw the highest proportion of funds that were subsequently merged or liquidated. For example, 25% of all fourth-quartile domestic U.S. equity funds (based on 2014-2019 performance) were either merged or liquidated within the subsequent five years; the comparable figure for top-quartile funds was only 7%. There were similar results among both active equity and active fixed income funds (see Reports 5 and 11).
