Tuesday, December 17, 2013

SPIVA Scorecard: Persistent Lack of Persistence

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

Earlier this week, S&P Dow Jones Indices released their semiannual SPIVA Persistence Scorecard, which assesses how consistent top performing actively managed US equity mutual funds have been.  This is the third SPIVA release since our blog has been in existence and each time we bring attention to their work.  Once again, their results suggest that mutual fund managers only rarely outperform for long.

This year the study found that roughly 7% of funds that were in the top 25% of actively managed mutual funds in September 2011 remained in the top 25% as of September 2013.  If an investor had randomly chosen one of these top-performing actively managed mutual funds in 2011 by chance, then there would have been roughly a 6% chance of holding a top performing mutual fund.  In other words, knowing that an actively managed mutual fund is a top-performer tells an investor almost nothing about the likelihood of the mutual fund outperforming its peers over time.

Although the precise findings of each semiannual report vary, the message remains consistent: very few actively managed funds are able to consistently outperform their peers.  Summarizing their results, the authors state that "very few funds can consistently stay at the top. Our studies show that as time horizons widen, the performance persistence of top quartile managers declines."

While these results are based on an analysis of actively managed equity mutual funds, they may have implications for other types of investments as well.  For example, exchange-traded funds (ETFs) have typically been considered passive investments, but are increasingly adopting active or even non-transparent strategies.  Presumably similar results hold in this context and we hope to determine in this is the case in the near future.

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