Tuesday, January 29, 2013

Persistence Scorecard

By Tim Dulaney, PhD and Tim Husson, PhD

Late last month, S&P Dow Jones Indices released their persistence scorecard (PDF) which tracks the "consistency of top [mutual fund] performers over yearly consecutive periods" using the University of Chicago's CRSP database.  This report aims to address the question "does past performance really matter?" by asking whether mutual funds can consistently deliver high returns over several consecutive years.

Their sample includes only actively managed domestic US equity mutual funds -- and only the largest share class of each fund.  The report, like the SPIVA scorecards, do not stand as a shining endorsement for the universe of actively managed mutual funds. 

According to the report, of the 700+ funds that were in the top 25% of mutual funds as of September 2010, only 10% remained in the top 25% at the end of September 2012.  In other words, only 2.5% of all actively managed mutual funds in their sample were in the top quartile in September 2010 and September 2012.

Based purely upon chance, one would expect that 25% of the funds would remain in the top half for three consecutive years.  The only category to do slightly better than random expectations was the small-cap category (29.4% remained in the top half for three consecutive years).  Again, based purely upon chance, you'd expect 6.25% of the funds to remain in the top half for five consecutive years.  In this case, no category met random expectations -- for example, only 3.2% of mid-cap funds remained in the top half for five consecutive years.

An actively managed equity mutual fund initially in the top quartile has almost a one in four chance of being in the bottom quartile after a three year period.  The same is apparently true when considering period of five years.   The takeaway message here is that when choosing between actively managed mutual funds, you likely won't beat a coin toss.

2 comments:

  1. I'm not sure your one data set using point data 2 years apart is convincing.

    Perhaps try 'Do Winners Persist?' and 'Do Winners Persist with Style,' among others to get the correct answer of MF persistence.

    spoiler: Yes, the best funds persist with the best performance.

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  2. Thanks for the comment. I think if you look at the S&P Dow Jones study more closely, you'll find that they actually do a lot better than "one data point". You're right that the study does not break down their sample by style (growth vs. value vs. core), but the study does break down the funds in their sample by capitalization.

    For example, in one part of the study, S&P Dow Jones reported that among actively managed US small cap equity funds in the top half of their capitalization category in September 2008, only 5.1% remained in the top half five years later (below even the random expectation of 6.25%).

    Including the style of the fund may change the quantitative results, but I believe that such a study may have a small sample size problem (unless one ignores capitalization). I'd be interested to see the results of such a study, but I think it is unlikely that the results will differ qualitatively from the S&P Dow Jones study.

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