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U.S. Persistence Scorecard Year-End 2020

Europe Persistence Scorecard: Year-End 2020

SPIVA Japan Year-End 2020

SPIVA® Latin America Year-End 2020

SPIVA® India Year-End 2020

U.S. Persistence Scorecard Year-End 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

Can investment results be attributed to skill or luck?  Genuine skill is 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 short-lived, with few funds consistently outranking their peers.

Compared to previous years, active fund persistence somewhat improved in 2020.  For example, 64.5% of domestic equity funds in the top half of the distribution for 2018 continued in the top half in 2019, and 55.0% repeated that feat in 2020.  At first glance, this lends some credence to the idea of persistent outperformance (see Report 1).

However, rewind the clock two years, and of the top-half funds of 2016, 21.4% repeated that accomplishment in 2017, with just 4.8% ranking in the top half each year through 2020.  This rate is lower than what random chance would predict (see Exhibit 1 and Report 2).

U.S. Persistence Scorecard Year-End 2020 - Exhibit 1

This difference in persistence over three- and five-year windows was also visible in top-quartile funds.  Of the top-quartile domestic equity funds in 2018, 33.7% managed to stay in the top quartile annually through 2020.  In fact, in every equity category, more than 25% of 2018’s top-quartile funds stayed in the top quartile annually through 2020.  Looking at 2016’s top-quartile funds paints a different picture: even in the best-performing category, mid-cap funds, only 1.5% of funds managed to stay in the top quartile annually through 2020 (see Reports 1 and 2).

Some statistically minded readers might note that these numbers are better than what would be expected if fund performance was randomly distributed.  For example, the odds that a fund could remain in the top quartile for four consecutive years might be calculated as (25%)4 = 0.39%, and the 1.5% referenced above is substantially better than that.  While the persistence report does not prove that fund performance is completely random, from a practical or decision-making perspective, it reinforces the notion that choosing between active funds on the basis of previous outperformance is a misguided strategy.  After all, there remains a 98.5% chance that a top-quartile fund will not stay in the top quartile for the next four years. 

Lengthening the horizon to consider performance over two consecutive five-year periods, the top-half domestic equity funds in the 2011-2015 period had little luck maintaining their top-half status for the 2016-2020 period.  In fact, the chances of a top-half fund changing style or liquidating (39.8%) nearly matched the odds of remaining in the top half (41.0%) (see Report 6).

Unsurprisingly, the one pattern that did hold across equity funds was the tendency of the poorest funds to close.  Fourth-quartile funds were the most likely to merge or liquidate over the subsequent three- and five-year windows, with 40.6% of the bottom-quartile mid-cap funds from the 2011-2015 period disappearing by 2020.  In fact, closing their doors was the most likely outcome in four out of five equity categories for fourth-quartile funds in that period (see Report 5).

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Europe Persistence Scorecard: Year-End 2020

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Andrew Innes

Head of EMEA, Global Research & Design

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Andrew Cairns

Associate Director, Global Research & Design

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Alberto Allegrucci

Senior Research Analyst, Global Research & Design

INTRODUCTION

For the first time, we are introducing the Europe Persistence Scorecard, differentiating skill from luck by examining the ability of active European equity funds to consistently outperform their peers and their benchmark.  This scorecard looks to support the well-known disclaimer that past performance is not indicative of future results and that oftentimes an investor would have better success in selecting a fund at random rather than from a group of top performers.

In this report, we pose two questions: did top funds stay ahead of the pack, and did outperforming funds continue to outperform their benchmark?  In summary, active funds were generally less able to persistently outperform their benchmark than they were their peers.

PERSISTENCE – DID THE TOP FUNDS STAY AHEAD OF THE PACK?

Pan-European Equity Funds: Over the shorter term, Report 1 indicates that there may have been some predictability by selecting a top-quartile Europe Equity fund.  The percentage of funds that remained in the top quartile for three consecutive 12-month periods was 15.8%, far higher than what would have been expected from selecting a fund at random (0.252 = 6.25%).

This notion is not further substantiated after viewing the performance persistence over five consecutive 12-month periods (see Report 2).  The percentage of funds that did so was 0.41%, close to what would have been expected from a random draw (0.254 = 0.39%).

Europe Persistence Scorecard: Year-End 2020 Exhibit 1 Chart

A similar picture is evident when observing the persistence of funds remaining in the top half of their fund category group.  From Report 2, the percentage of funds that remained in the top half for four more years was 5.14%; this is lower than what would be expected from selecting a fund at random.  The probability of that fund remaining in the top half for four consecutive years is 0.54 = 6.25%.

However, when measuring performance over longer windows (rather than measuring persistence over more consecutive periods), the transition matrices in Report 3 and 5 again show evidence that supports persistence.  41.3% of top quartile European funds repeated their ability to position in the top quartile when observing two consecutive three-year windows, and up to 42.0% did so when observing five-year windows.

Other Equity Funds in Europe: From the remaining five equity fund categories, Global Equity, U.S. Equity, and U.K. Equity also displayed a higher degree of persistence of funds remaining in the top quartile for three consecutive 12-month periods than would otherwise be expected from a random selection.  However, only Global Equity and U.K. Equity funds demonstrated a better-than-random persistence on the same basis over five consecutive 12-month periods.  Strikingly, none of the funds in Eurozone Equity, Emerging Markets Equity, or U.S. Equity were able to deliver five consecutive top-quartile rankings.

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SPIVA Japan Year-End 2020

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Arpit Gupta

Senior Analyst, Global Research & Design

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Tim Wang

Senior Analyst, Global Research & Design

SUMMARY

  • S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the SPIVA U.S. Scorecard in 2002. Over the years, we have built upon our experience by expanding scorecard coverage into Australia, Canada, Europe, India, South Africa, Latin America, the Middle East and North Africa, and Japan.  While this report will not end the debate surrounding active versus passive investing in Japan, we hope to make a meaningful contribution by examining market segments in which one strategy performs better than the other.
  • The SPIVA Japan Scorecard reports on the performance of actively managed Japanese mutual funds against their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.[1] In this scorecard, we evaluated returns of more than 777 Japanese large- and mid/small-cap equity funds, more than 743 international equity funds investing in global, international, and emerging markets, as well as U.S. equities.

  • Japanese Equity Funds: In 2020, the S&P/TOPIX 150 gained 10.3%, and the S&P Japan MidSmallCap was nearly flat. Over the same period, 46.0% and 82.4% of large- and mid/small-cap equity funds beat their respective benchmarks, with equal-weighted average returns of 10.5% and 13.2%, respectively.  Benchmark-relative performance of domestic equity funds in 2020 was better than in 2019, with higher percentages of funds outperforming the benchmark.

    Over the 10-year horizon, 22.7% and 52.4% of large- and mid/small-cap funds managed to outperform their benchmarks, while 35.0% and 35.7% of funds were liquidated, respectively.  The large-cap funds recorded equal- and asset-weighted average excess returns of 3.2 bps and 4.3 bps relative to benchmark, respectively, while the mid/small-cap funds reported excess returns of 3.86% and 1.85% on equal- and asset-weighted bases, respectively.  Japanese mid/small-cap funds tended to deliver higher benchmark-relative excess return compared with Japanese large-cap funds.

  • International Equity Funds: In 2020, fewer funds in the U.S. and global equity fund categories underperformed their benchmarks than in 2019, while the opposite was observed in the international and emerging market equity fund categories. For U.S. and global equity funds, 68.4% and 52.4% underperformed their respective benchmarks, and 77.4% and 60.5% of international and emerging market equity funds lagged their benchmarks, respectively.  For 2020, global equity funds delivered an equal-weighted excess return of 5.1% versus the S&P Global 1200, while the rest of the foreign equity fund categories reported negative equal-weighted average returns relative to their benchmark indices.  Significant divergence between the asset- and equal-weighted average returns were observed for global equity funds, with asset-weighted return exceeding the equal-weighted returns by 14.1%.

    Over the 10-year period, the majority of foreign equity funds underperformed their respective benchmarks.  More than 90% of global, international, and emerging equity funds underperformed their respective benchmarks, while 78.3% of U.S. equity funds failed to beat the S&P 500®.   However, U.S. equity funds had the worst benchmark-relative excess return on both equal- and asset-weighted bases (-6.1% and -6.0%, respectively).  Foreign equity funds had a 10-year liquidation rate of 46.3%, which was much higher than that of domestic equity funds (35.3%).

SPIVA Japan Year-End 2020 Exhibit 1

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SPIVA® Latin America Year-End 2020

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María Sánchez

Associate Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

SUMMARY

The S&P Indices Versus Active (SPIVA) Latin America Scorecard compares the performance of actively managed mutual funds in Brazil, Chile, and Mexico to their benchmarks over 1-, 3-, 5-, and 10-year periods.

The year 2020 was a volatile one for financial markets.  After a significant sell-off during the first quarter, markets rebounded later in the year.  However, the recovery was marked with uncertainty.  Despite this higher volatility, the majority of active managers failed to outperform, especially over longer periods.  The Chile Equity Fund category did slightly better and active managers were able to beat their benchmark over the one-year period.  However, even this advantage disappeared over longer periods.

Brazil

  • After falling 15.62% the first half of the year, the S&P Brazil BMI gained 26.90% during the second half. The Brazilian equity market finished 2020 up 7.08% (see Report 3). Large- and mid-small-cap companies also recovered during the last six months of 2020, returning 28.99% and 21.39%, respectively, as measured by the S&P Brazil LargeCap and S&P Brazil MidSmallCap. In August 2020, the National Monetary Council cut policy interest rates (Selic) by 25 bps, from 2.25% to 2.00%, and held rates steady for the rest of the year. This helped financial markets rebound during the second half of the year.
  • Over the one-year period, most active fund managers underperformed their benchmarks in all categories: 74.14% of Brazil Equity Fund managers, 88.80% of the Brazil Large-Cap Fund managers, and 63.22% of the Brazil Mid-/Small-Cap Fund managers did not beat their benchmarks. In addition, active managers from all categories fared poorly relative to their respective benchmarks over the 5- and 10-year periods (see Report 1).
  • All categories, except Brazil Government Bond Funds, showed that over the one-year period, larger funds (by assets) performed worse than their smaller peers, especially Brazil Mid-/Small-Cap Funds. However, over the 10-year horizon, larger funds performed better than smaller funds on an equal-weighted basis (see Report 3) versus an asset-weighted basis (see Report 4).

    Chile

    • The 5.34% recovery seen in the Chilean equities market during the latter half of 2020 was not enough to close the year positive. Overall, Chilean equities closed the year down 10.08% over the 12-month period ending in December 2020, as measured by the S&P Chile BMI.
    • The majority of active equity fund managers underperformed the S&P Chile BMI over the 3-, 5-, and 10-year periods, with the median of funds underperforming the benchmark by 1.66%, 2.96%, and 2.60%, respectively (see Report 5). The performance was worse over longer time horizons, with 95.24% and 97.73% of funds underperforming the benchmark over the 5- and 10-year periods, respectively (see Report 1). 
    • • Smaller funds performed relatively better than larger funds over 3-, 5-, and 10-year periods on an equal-weighted basis (see Report 3) versus an asset-weighted basis (see Report 4). Over the one-year period, larger funds performed better by 29 bps.

    Mexico

    • The S&P/BMV IRT gained 18.54% over the second half of 2020. However, the index returned 3.35% for the year. The majority of active managers underperformed the S&P/BMV IRT over all periods observed (see Report 1).
    • Median fund underperformance was 2.63%, 1.73%, 3.13%, and 1.23% for the 1-, 3-, 5-, and 10-year periods, respectively (see Report 5). The highest-performing managers in the category (first quartile) outperformed the S&P/BMV IRT by 112 bps and 107 bps over the one- and three-year periods, respectively. They could not sustain this outperformance for longer periods and underperformed by 26 bps and 15 bps over trailing 5- and 10-year horizons, respectively.
    • The survival rates of Mexico Equity Funds were the highest of Latin America, at 97.96%, 92%, 91.11%, and 75.76%, over the 1-, 3-, 5-, and 10-year periods, respectively (see Report 2).

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    SPIVA® India Year-End 2020

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    Akash Jain

    Associate Director, Global Research & Design

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    Arpit Gupta

    Senior Analyst, Global Research & Design

    S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active Funds (SPIVA) U.S. Scorecard in 2002. Over the years, we have built on our experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.

    The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, we studied the performance of three categories of actively managed equity funds and two categories of actively managed bond funds over the 1-, 3-, 5-, and 10-year periods ending in December 2020.

    The strong rebound that began in early Q2 of calendar year 2020 continued into H2 2020, with the S&P BSE 100 finishing the six-month period up 36.48%. During this recovery period, the majority of the equity active funds in the Indian Equity Large-Cap and ELSS categories lagged their respective benchmarks (see Exhibit 1).

    In the second half of 2020, the asset-weighted returns were lower than their respective benchmark returns in each of the Indian Equity categories: large-cap funds (by 273 bps), ELSS funds (by 318 bps) and mid- and small-cap funds (by 230 bps). 

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