Do Past Mutual Fund Winners Repeat? The S&P Persistence Scorecard
Abstract:
The phrase “past performance is not an indicator of future outcomes” is a common fine print line found in all mutual fund literature. Yet due to either force of habit or conviction, both investors and advisors consider past performance and related metrics to be important factors in fund selection.
Does past performance really matter? The semi-annual S&P Persistence Scorecard seeks to track the consistency of top performers over three- and five-consecutive year periods, and measure performance persistence through transition matrices for three- and five-year non-overlapping holding periods. As in our widely followed Standard & Poor’s Indices Versus Active Funds (SPIVATM) Scorecards, the University of Chicago’s CRSP Survivorship Bias Free Mutual Fund Database underlies our analysis.
Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a topquartile ranking over the same period.
Looking at longer term performance, 24.32% of large-cap funds with a topquartile ranking over the five years ending September 2004 maintained a top-quartile ranking over the next five years. Only 16.39% of mid-cap funds and 27.06% of small-cap funds maintained a top-quartile performance over the same period. Random expectations would suggest a repeat rate of 25%.
Our research suggests that screening for top-quartile funds may be inappropriate. A healthy plurality of future top-quartile funds comes from the prior period’s second, third and even fourth quartiles. Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.
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