Standard & Poor’s has launched the first scorecard in the US that measures the consistency of top mutual fund performers over three and five consecutive years. The semi-annual scorecard also measures performance persistence, corrected for survivorship bias, through transition matrices for one-, three- and five-year, non- overlapping holding periods.
As of May 31st, the Standard & Poor’s scorecard shows that only 10.7% of large-cap funds, 9.2% of mid-cap funds, and 11.5% of small-cap funds maintained a top-quartile ranking over three consecutive years. Standard & Poor’s data also shows that 28.9% of large-cap, 26.4% of mid-cap and 27.9% of small-cap funds maintained a top-half ranking over the same time period.
The scorecard also tracks cumulative performance over two non-overlapping three-year periods. The average top-quartile (top-half) repeat performance was 27.7% (47.9%). Not surprisingly, Standard & Poor’s determined that 4th quartile funds had a higher probability of disappearing. Over the three-year time horizon, 33.5% of large-cap, 32.3% of mid-cap, and 26.9% of small-cap 4th quartile funds disappeared due to mergers or liquidations. A large percentage of the 4th quartile funds that survived still remained in the bottom half.
“Our research suggests that maintaining a top quartile position over longer horizons is very difficult,” says Srikant Dash, Index Strategist at Standard & Poor’s. “Only 3.0% of small-cap funds maintained a top quartile ranking over two non-overlapping five year periods, while there were no such funds in the large- and mid-cap category. Repeat top-half performers totaled 18.2%, 12.9% and 17.2% for large-cap, mid-cap and small-cap funds, respectively.”
“Whether we viewed consecutive 12-month performance or non-overlapping cumulative periods, the characteristics of top-half winners were similar,” says Rosanne Pane, Mutual Fund Strategist at Standard & Poor’s. “Management experience counts, expenses matter, and protecting the downside helps. Consistent top-half performers had longer manager tenure and lower expenses relative to their peers. In addition, consistent winners also minimized or avoided losses during the bear market relative to their peers.”