Since 2002, S&P Dow Jones Indices has published its biannual S&P Indices Versus Active (SPIVA) scorecards, which compare the performance of actively managed equity funds to their appropriate index benchmarks. Its midyear reports focus on the question of persistence of performance.
This is an important question, because if persistence isn’t significantly greater than should be randomly expected, investors cannot separate skill-based performance (which might be able to persist) from luck-based performance (which eventually runs out). Following are some of the highlights from the 2017 midyear report:
- Out of 568 domestic equity funds that were in the top quartile of funds as of March 2015, only 1.9% managed to stay in the top quartile at the end of March 2017. Of the funds in the top quartile as of March 2015, only 0.9% of the large-cap funds, 2.4% of the midcap funds and 2.3% of the small-cap funds remained there two years later. Given that, randomly, we would expect 6.3% to do so, we have evidence both that it’s very hard to separate skill from luck in fund performance, and that relying on past performance is a fool’s errand.
- Over three-consecutive 12-month periods ending March 2017, just 23.5% of large-cap funds, 11.4% of midcap funds and 22.1% of small-cap funds maintained a top-half ranking. Randomly, we would expect 25% to do so.
- The picture doesn’t get any better when we look at the five-year horizon. Just 4.0% of large-cap funds, 5.9% of midcap funds and 5.8% of small-cap funds maintained top-half performance over five-consecutive 12-month periods. Randomly, we would again expect a repeat rate of 6.3%.
In no case, according to the report, was there evidence of persistence of performance of active equity managers greater than randomly expected. Making matters worse is that there was a stronger likelihood of the best-performing funds becoming the worst-performing funds than vice versa. Of 370 funds in the bottom quartile, 17.8% moved to the top quartile over the five-year horizon, while 27.6% of the 370 funds in the top quartile moved to the bottom quartile during the same period.
The one area in which there was evidence of persistence was that funds in the worst-performing quartile were much more likely to be liquidated or merged out of existence, highlighting the importance of making sure survivorship bias isn’t in the data.
The results for fixed-income funds were somewhat better. For example, over the five-year measurement horizon, a lack of persistence existed among most of the top-quartile fixed-income categories, but with a few exceptions.
Of the 13 fixed-income fund categories, funds investing in short-term government bonds, long-term investment-grade bonds, mortgage-backed securities, general municipal debt and California municipal debt were the only groups in which a noticeable level of persistence was observed. In the other eight fixed-income categories, there were no funds with five years of persistence in the top quartile.
Summarizing, the SPIVA scorecards provide powerful evidence of the persistent failure of active management’s ability to persistently outperform. They also provide compelling support for Charles Ellis’ observation that, while it’s possible to win the game of active management, the odds of doing so are so poor that it’s imprudent to try—which is why he called it “the loser’s game.”
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.