Thursday, July 18, 2013

Persistence Scorecard: Even Harder to Stay on Top

By Tim Dulaney, PhD and Tim Husson, PhD

S&P Dow Jones Indices has recently updated their semiannual Persistence Scorecard, which studies the consistency of returns for actively managed US equity mutual funds.  Like the previous Persistence Scorecard from December 2012, the updated study finds little evidence that actively-managed mutual funds can outperform stated benchmarks on a consistent basis.

In fact, the results are rather worse than in the previous study.  The report highlights three factors:

  • Percentage of funds in top quartile two years ago which are still in top quartile:
Jul 2013Dec 2012
5%10%
  • Percentage of funds maintaining top-half ranking over three consecutive 12-month periods (we should expect 25% by random chance):
TypeJul 2013Dec 2012
Large-cap17%24%
Mid-cap14%15%
Small-cap23%30%
  • Percentage of funds maintaining top-half performance over five consecutive 12-month periods (we should expect 6.25% by random chance):
TypeJul 2013Dec 2012
Large-cap2.4%5.2%
Mid-cap3.2%3.2%
Small-cap4.7%5.1%

These results once again suggest that, at least for US-based equity mutual funds, actively-managed funds rarely outperform for long.  As pointed out in the comments section of our previous post, this does conflict with older studies of mutual fund performance persistence, but these most recent results from S&P Dow Jones Indices suggest that the probability of persistent outperformance is below the probability of a successfully guessing the outcome of a coin toss.

An interesting extension of this work could be a similar study of actively managed ETFs, as this space has been growing recently, but most funds would not have at least two years of performance results.  We'll put that on our 2015 to-do list.

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