If the fund industry was hoping for breakout performance from actively managed funds, its hopes were once again dashed by S&P Dow Jones Indexes. “It's the persistence of nonpersistence,” said Aye M. Soe, Senior Director, Global Research & Design for S&P.
Just 2.46% of large-cap domestic stock funds managed to say in the top 25% of performance rankings over three consecutive 12-month periods, according to S&P's Persistence Scorecard . Other diversified funds didn't fare much better: Out of 631 domestic equity funds that were in the top quartile as of September 2014, only 2.85% managed to say in the top 25% by September 2016.
The top 25% is a tough place to stay over a long time. Using just the top half — in other words, above-average performance — 18.07% of large-cap funds, 22.95% of mid-cap funds, and 20.88% of small-cap funds maintained a top-half ranking.
Things get even worse over longer time periods. Fewer than 1% of large-cap funds and no mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period, S&P says.
Given the lack of persistence in performance and the popularity of index funds, it's not surprising that a fair number of poor performers are now singing with the Choir Invisible. In the past five years, 28.30% of large-cap funds, 23.73% of mid-cap funds, and 29.70% of small-cap funds in the fourth quartile have been liquidated or merged out of existence.
Fixed income funds fared somewhat better than stock funds, but their record is nothing to crow about. Just 3.7% of high-yield funds were able to maintain first-quartile performance for three consecutive years, and no global incomes were able to do so. Long-term government bond funds (53.33%) and general municipal bond funds (45%) had the best chance of keeping in the top 25% of their categories.
Ms. Aye noted, however, that the categories with the best persistence of performance tends to shift from year to year. “The key takeaway is that past performance doesn't predict future returns,” she said. For advisers, the study means that they can't rely only on past performance for make fund picks.
S&P adjusts its figures to correct for dead or liquidated funds, using the University of Chicago's Center for Research in Security Prices (CRSP) Survivorship Bias Free Mutual Fund Database.