Index Universe reports the following from the “S&P Persistence Scorecard,” which analyzes the persistence of top performing fund managers over time.
S&P found that over a five-year period ended March 2011:
- Of the funds with top-half rankings, only 0.96 percent of large-cap funds, 1.14 percent of midcap funds and 2.59 percent of small-cap funds maintained that top-half ranking over five consecutive 12-month periods. To put those numbers in perspective, random expectations would suggest a rate of 6.25 percent, S&P said.
- Of the funds with top-quartile rankings, 19.15 percent of large-cap funds maintained that top-quartile ranking over the next five years. Also, only 9.38 percent of midcap funds and 23.26 percent of small-cap funds did so over the same period. Random expectations suggest a rate of 25 percent, S&P said.
Of these results, Index Universe states the following: “the persistence data paint a damning picture of the world of actively managed investments.” Really?! Because the funds in the top half of the rankings five years ago did not maintain top-half performance in each of the past 5 years they conclude that this is damning evidence against actively managed investments. As pointed out above, 19.15 percent of large-cap funds did maintain their top-quartile rankings over the next five years. However, just because they weren’t in the top of the ranks every single year, the conclusion is that active management fails. The article also completely fails to address the issue of large percentage of managers who profess to be active, but are really closet indexers.
Any investor that expects their actively managed strategy to outperform every single year is asking for for a lifetime of disappointment. Does that mean that there are not actively managed strategies that outperform over time? Hardly. The evidence is pretty clear about historical results of relative strength and value, for example. Furthermore, history tells us that relative strength has not outperformed in all 3 and 5 year periods, but it sure has outperformed a high percentage of the time.
Source: Psychology Today
