Summary
Can investment results be attributed to skill or luck? Genuine skill is more likely to persist, while luck is random and fleeting. Thus, one measure of skill is the consistency of a fund’s performance relative to its peers. The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance tends to be relatively short lived, with few funds consistently outranking their peers.
Across all seven categories, not a single manager whose performance placed them in the top quartile for the 12-month period ending December 2019 managed to remain in the top quartile for the next four years (see Report 2). We also observe that the percentage of top-half actively managed domestic equity funds remaining in the top half over two consecutive five-year periods was above what would be expected from a random distribution for only three of the seven fund categories examined (see Exhibit 1 and Report 6).
Report Highlights
− 2023 was a challenging year for Canadian active managers, with 85% of Canadian Equity funds underperforming the S&P/TSX Composite Index. In addition, sustaining top-tier performance proved to be a significant challenge, as observed from the following statistics on how Canadian funds performed relative to their peers:
– Maintaining a position in the top quartile proved challenging for most funds across all categories. None of the top-quartile Canadian Focused Equity, Canadian Small-/Mid-Cap Equity, International Equity, and U.S. Equity funds maintained their position in the top quartile for the subsequent two years, compared to an expected 6.25% based on random chance (see Report 1).
– Over a five-year period, from the set of active funds that ranked in the top quartile in their categories at the end of December 2019, none managed to maintain that position over the subsequent four years (see Report 2).
– Only a minority of equity funds across categories managed to remain in the top quartile for two consecutive five-year periods. 14% of Canadian Equity funds remained in the top quartile over two consecutive five-year periods, below the 25% that would be expected under a random distribution (see Report 5).
– Over two consecutive five-year periods, a weighted average of 13% of all the top half active equity funds across categories were merged or liquidated. Meanwhile, among the bottom half of all categories, 29% of funds were subsequently merged or closed.
– The ability to sustain alpha was as elusive as keeping consistent high rankings among peers, with a cross-category average of only 4.4% of active equity funds that outperformed their benchmarks in 2021 managing to continue their outperformance across the following two years (see Report 1b).
