The phrase “past performance is not a guarantee of future results” has never rung more true for active mutual funds. Our semi-annual publication, the Persistence Scorecard, takes a look at the performance of top quartile active funds over three- and five-year consecutive 12-month periods. Based on the most recently released report, out of 265 large cap funds that were in the top quartile as of September 30 2011, only 5.28% (amounting to about 14 funds) remained in the top quartile at the end of September 2013. Only 10.31% of the funds managed to stay in the top quartile in the mid cap space while 8.28% of the small cap funds stayed in the top quartile. The breakdown of each fund category is highlighted in the table below.
Our study finds that performance persistence declined further over a longer-term five year horizon. Only 3.95% of the large cap funds (amounting to approximately 10 funds) and 1.92% of small-cap funds (merely 3 funds) remained in the top quartile at the end of the study period. It is worth noting that no mid cap funds managed to remain in the top quartile.
In short, the report is a sobering reminder that we cannot use the past performance figures as the sole or the most important criteria in fund selection. In addition, the transition matrices in Report 4 and 5 suggest that a healthy percentage of top quartile funds in the subsequent period come from prior period second or third quartiles.
About Aye Soe
Aye M. Soe is director, index research and design, at S&P Dow Jones Indices. Aye is responsible for conceptualization, research and design covering global strategy, factor based, alternative beta and thematic indices across different asset classes. Aye also regularly publishes on a number of headline S&P publications as well as research papers related to capital markets and investment concepts.
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