Here is an outline of my experiment and its results:
- On the active side, I exclusively considered top-quartile mutual fund share classes in the Morningstar database as of the first quarter of 2009.
- I screened the database for small blend share classes (some funds have multiple share classes) that were ranked in the top performance quartile for 2008. This resulted in 152 share classes.
- 9 of these share classes merged before the performance period ended and were not counted in the analysis.
- 4 of these share classes were liquidated before the performance period ended and were not counted in the analysis.
- The evaluation period is the 1st quarter of 2009 and the performance period is five years from April 2009 to March 2014.
- Of the 139 remaining share classes with a full 5-year history through March 2014, only 9 beat the S&P SmallCap 600 benchmark (5.9% of the starting set).
This analysis differs from the Scorecard in two ways:
- It compares top quartile funds to an appropriate benchmark rather than counting how many funds remain in the top quartile from period to period.
- It shows the magnitude of under-performance and out-performance, as well as the frequency of each.
This article was written by Philip Murphy, vice president, North American equities, S&P Dow Jones Indices.
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