INTRODUCTION
The Europe Persistence Scorecard aims to differentiate 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 may 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 beat their benchmark?
YEAR-END 2021 HIGHLIGHTS
Pan-European Equity Funds: Looking at the two-year period since the COVID-19 pandemic started, 52% of the top-quartile Europe Equity funds at the start of 2020 were able to remain in the same category by the end of the same year. By the end of 2021, over 21% of these same starting funds were still in the top quartile. This figure is far higher than what would be expected through choosing a fund at random (6.25%). This short-term persistence was not unique to Europe Equity over this period; across all fund categories, at least 6.25% of funds remained in the top quartile for three consecutive years.
While top-quartile funds may have demonstrated a better chance of repeating their relative success over this most recent period, it seems that may not have necessarily translated to outperformance when compared with their benchmarks. To avoid the risk of drawing conclusions from a single time period, Report 8 analyzes the persistence of outperformance on average over rolling quarters. Europe Equity funds that had beaten the benchmark in any rolling three-year window over the period analyzed had a 44.4% probability of outperforming in the subsequent year. The probability of the same funds outperforming for three consecutive years following their initial success dropped to 7.2%.
Report 5 indicates that there may also have been some predictability when it comes to bottom-quartile funds; the report shows that 62% of Europe Equity funds in the bottom quartile either remained there or ceased to exist over the subsequent five years. In fact, in all fund categories, fourth-quartile active funds were more likely to remain relatively poor performers, with fewer than 10% able to turn their fortunes around and become first-quartile funds.
