INTRODUCTION
For the first time, we are introducing the Europe Persistence Scorecard, differentiating skill from luck by examining the ability of active European equity funds to consistently outperform their peers and their benchmark. This scorecard looks to support the well-known disclaimer that past performance is not indicative of future results and that oftentimes an investor would have better success in selecting a fund at random rather than from a group of top performers.
In this report, we pose two questions: did top funds stay ahead of the pack, and did outperforming funds continue to outperform their benchmark? In summary, active funds were generally less able to persistently outperform their benchmark than they were their peers.
PERSISTENCE – DID THE TOP FUNDS STAY AHEAD OF THE PACK?
Pan-European Equity Funds: Over the shorter term, Report 1 indicates that there may have been some predictability by selecting a top-quartile Europe Equity fund. The percentage of funds that remained in the top quartile for three consecutive 12-month periods was 15.8%, far higher than what would have been expected from selecting a fund at random (0.252 = 6.25%).
This notion is not further substantiated after viewing the performance persistence over five consecutive 12-month periods (see Report 2). The percentage of funds that did so was 0.41%, close to what would have been expected from a random draw (0.254 = 0.39%).
A similar picture is evident when observing the persistence of funds remaining in the top half of their fund category group. From Report 2, the percentage of funds that remained in the top half for four more years was 5.14%; this is lower than what would be expected from selecting a fund at random. The probability of that fund remaining in the top half for four consecutive years is 0.54 = 6.25%.
However, when measuring performance over longer windows (rather than measuring persistence over more consecutive periods), the transition matrices in Report 3 and 5 again show evidence that supports persistence. 41.3% of top quartile European funds repeated their ability to position in the top quartile when observing two consecutive three-year windows, and up to 42.0% did so when observing five-year windows.
Other Equity Funds in Europe: From the remaining five equity fund categories, Global Equity, U.S. Equity, and U.K. Equity also displayed a higher degree of persistence of funds remaining in the top quartile for three consecutive 12-month periods than would otherwise be expected from a random selection. However, only Global Equity and U.K. Equity funds demonstrated a better-than-random persistence on the same basis over five consecutive 12-month periods. Strikingly, none of the funds in Eurozone Equity, Emerging Markets Equity, or U.S. Equity were able to deliver five consecutive top-quartile rankings.
