Active mutual fund managers that are able to deliver above-average returns one year are not guaranteed to deliver again. Consequently, investors who are less inclined to bet on an active strategy may look for more consistency with a passive, index-based exchange traded fund.
“When it comes to the active versus passive debate, one of the key measurements of successful active management lies in the ability of a manager or a strategy to deliver above-average returns consistently over multiple periods. Demonstrating the ability to outperform peers repeatedly can be one way to differentiate a manager’s luck from skill,” Aye M. Soe, Managing Director of Global Research & Design, and Ryan Poirier, Senior Analyst of Global Research & Design, wrote in a S&P Do Jones Indices research note.
According to the S&P Persistence Scorecard, only a few funds can consistently stay on top. Of the 568 domestic equity funds that placed in the top quartile at the end of March 2015, only 1.94% stayed there at the end of March 2017 – 0.92% of large-cap funds, 2.38% of mid-cap funds and 2.26% of small-cap funds remained in the top quartile.
Looking at a broader segment of performances, about 23.45% of large-cap funds, 11.38% of mid-caps funds and 22.1% of small-cap funds maintained a top-half ranking for the three years ended March 2017.