Can investment results be attributed to skill or luck? Genuine skill is more 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. The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance is typically relatively short-lived, with few funds consistently outranking their peers.
The first half of 2022 saw the winds change materially for investors across asset classes, with active fund persistence decreasing in comparison to previous reports. Within each of our reported domestic equity categories, among all the funds whose performance placed them in the top quartile for the 12 months ending June 2020, not a single fund managed to remain in the top quartile over the next two years.
Exhibit 1 illustrates the evolution of top-half persistence statistics over time for all actively managed domestic equity funds, compared to what might be expected under a random distribution.
− Very few actively managed equity and fixed income funds managed to maintain consistent outperformance relative to their peers over the three- or five-year periods ending in June 2022.
− Of the actively managed equity funds whose 12-month performance placed them in the top quartile of their respective category as of June 2020, not a single fund maintained its top-quartile performance over the next two 12-month intervals.
− In 12 out of 17 reported fixed income categories, no actively managed fund managed to maintain top-quartile performance over three consecutive 12-month periods ending June 2022. In 14 out of 17 categories, less than 25% of funds whose three-year performance placed them in the top half of their category as of June 2020 managed to maintain their record over the subsequent two years.
− Over a five-year horizon, it was statistically near impossible to find consistent outperformance. Among all actively managed funds whose performance over the 12 months ending June 2018 placed them in the top quartile within their respective category, not one fund in any of our reported fixed income and equity categories remained in the top quartile in each of the four subsequent one-year periods ending in June 2022.
− Over discrete three- and five-year periods, there was some evidence of persistence in relative outperformance in fixed income categories, but less so in equities. For purposes of comparison, 25% of top-quartile funds would be expected to remain in the top quartile in a subsequent period if performance was purely random. Our scorecard reports an unweighted average of 14% and 31% remaining in the top quartile, respectively, across equity and fixed income categories over the past two consecutive three-year periods, and equivalent figures of 18% and 30% over the past two consecutive five-year periods.
− Poor performance continued to be a reliable indicator of future fund closures. For example, of the actively managed domestic equity funds whose performance placed them in the bottom quartile of performance over the five-year period ending in June 2017, more than 29% were subsequently merged or liquidated over the next five years. In fact, in every reported equity category, and in all but two of our reported fixed income categories, the worst-performing quartile over the previous five years saw the highest (or joint-highest) proportion of funds that were subsequently merged or liquidated over the next five years.