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Latin America Persistence Scorecard Year-End 2022

Europe Persistence Scorecard: Year-End 2022

U.S. Persistence Scorecard Year-End 2022

SPIVA Latin America Year-End 2022

SPIVA MENA Year-End 2022

Latin America Persistence Scorecard Year-End 2022

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Joseph Nelesen, Ph.D.

Head of Specialists, Index Investment Strategy

S&P Dow Jones Indices

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Benedek Vörös

Director, Index Investment Strategy

S&P Dow Jones Indices

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

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.

Among a total of 193 funds in our seven reported regional fund categories across Brazil, Chile and Mexico whose performance placed them in the top quartile for the 12-month period ending December 2018, only two funds (less than 5%) managed to remain in the top quartile for each of the next four years (see Report 2).  Exhibit 1 illustrates that across all categories except one, less than 50% of funds were able to repeat their top-half status over two consecutive five-year periods.

Exhibit 1: Percentage of Funds Repeating in Top Half over Two Consecutive Five-Year Periods

Report Highlights

Brazil

  • Brazil’s top-performing equity fund managers did not maintain their outperformance in subsequent years. Among equity funds ranked in the top-quartile for the 12 months ending December 2018, none remained consistently in the top quartile over the subsequent three one-year periods (see Report 2).  Active fund outperformance in 2020 did not predict outperformance in the two subsequent years (see Report 1b).
  • The Brazil Government Bond funds category showed similar erosion of outperformance, with precisely zero top-quartile managers as of December 2018 managing to remain in the top quartile for the subsequent four 12-month periods (see Report 2).
  • Brazil Corporate Bond funds fared slightly better, with 4.8% of managers maintaining consistent top-quartile performance for five years in a row, and 33.3% remaining in the top quartile for two consecutive five-year periods (see Report 2 and Report 5).

Chile

  • The rarity of persistence by equity managers was equally visible in Chile, with only one out of nine (11.1%) of the top-quartile funds in the first 12-month period repeating its outperformance for the subsequent four years (see Report 2).
  • Report 3 shows that 25.0% of the top-quartile funds in the first period of the three-year transition matrix remained in the top quartile at the end of the second period.
  • Among funds ranked in the top half for the three years ending December 2019, the majority either fell to the bottom half, were merged or were liquidated over the subsequent three-year period (see Report 4).

Mexico

  • Similar to the other regions, top-quartile managers in Mexico had difficulty replicating their rank in subsequent years. After one year, just 18.2% of Mexico Equity funds remained in the top quartile, and after four years, none remained (see Report 2).
  • The five-year transition matrix shows that 60% of top-quartile funds subsequently dropped to quartile three or four over the five-year period, or were merged or liquidated, while only 20.0% remained in the top (see Report 5).
  • Consistent with data from the SPIVA® Latin America Year-End 2022 Scorecard, Mexico had a higher fund survival rate than Brazil and Chile across all periods measured. Reports 3, 4, 5 and 6 show that, on average, Mexican funds were less likely to be shut down than Brazilian and Chilean funds.

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Europe Persistence Scorecard: Year-End 2022

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Benedek Vörös

Director, Index Investment Strategy

S&P Dow Jones Indices

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

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Joseph Nelesen, Ph.D.

Head of Specialists, Index Investment Strategy

S&P Dow Jones Indices

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 is typically relatively short-lived, with few funds consistently outranking their peers.

In five of the six reported equity fund categories and three of the four reported fixed income categories, not a single manager whose performance placed them in the top quartile for the 12-month period ending December 2018 managed to remain in the top quartile for the next four years (see Report 2 and Report 8).

Exhibit #1: Europe Persistence Scorecard: Year-End 2022

On the other hand, lowering the bar from the top quartile to the top half provides tentative evidence of persistence among a fraction of EUR-denominated fund categories.  As Exhibit 1 illustrates, 10% of active funds in the High Yield Bond (EUR) category, 9% of active funds in the Global Equity category and 8% of active funds in the Eurozone Equity category were able to maintain their top-half status over five consecutive one-year periods.

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U.S. Persistence Scorecard Year-End 2022

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Craig Lazzara

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

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Grace Stoddart

Quantitative Associate, Index Investment Strategy

S&P Dow Jones Indices

Summary

Strong theoretical arguments and extensive empirical data support the expectation that most active managers should underperform most of the time. But most active managers are not all active managers, and most of the time is not all of the time. When we observe active management success, how can we tell whether it is the product of genuine skill or merely the result of good luck? One answer is that results produced by genuine skill are likely to persist, while those due to luck are likely to prove ephemeral.

The Persistence Scorecard is designed to address this question. Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods. Exhibit 1 illustrates the general point, using 10 years of return data for U.S. equity managers. 

U.S. Persistence Scorecard Year-End 2022: Exhibit 1

Following Report 6, we consider the above-median managers in each fund category for the first five years, and then ask what fraction of the initial set of top managers repeated their above-median performance in the second five years.  If performance were completely random, we would expect 50% of the winners in the first five years also to win in the second five years; if substantially more than 50% of the winners repeated in the second interval, that might be evidence of consistent skill. Results, however, fell well short of this mark.

Report Highlights

Results of the U.S. Persistence Year-End 2022 Scorecard are broadly consonant with those of prior years, despite 2022’s relatively benign environment for active U.S. managers.  A declining market, the underperformance of mega-cap stocks, record sectoral spreads and above-average dispersion all militated in favor of active management, and yet 51% of large-cap U.S. equity funds lagged the S&P 500®. That most active managers underperformed in what might have been a favorable milieu helps explain why consistent value added, while much desired, is seldom observed.

− Only 5% of the above-median large-cap active equity funds in calendar year 2020 remained above median in each of the two succeeding years. (If outperformance were purely random, we would expect a 25% repeat rate.)  We see similar results for other fund categories (see Report 1).

− Of 2020’s top quartile large-cap funds, none continued in the top quartile for the next two years (versus 6.25% random expectation). These results were echoed in other fund categories (see Report 1).

− Consistent value added was just as elusive as consistently good peer group rankings. Outperformance by active managers in 2020 did not predict outperformance in the two subsequent years (see Report 1b).

− Results for active fixed income managers were somewhat better than for their equity counterparts, although still typically below the level suggested by chance (see Report 7).

− We continue to find evidence of persistence at the unfavorable end of the distribution. For example, 28% of all fourth quartile U.S. equity funds (based on 2012-2017 performance) were merged or liquidated within the next five years.  The comparable figure for top quartile funds was only 10%.  Results for active fixed income funds were similar (see Reports 5 and 11).

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SPIVA Latin America Year-End 2022

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Joseph Nelesen, Ph.D.

Head of Specialists, Index Investment Strategy

S&P Dow Jones Indices

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Anu R. Ganti

U.S. Head of Index Investment Strategy

S&P Dow Jones Indices

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

SUMMARY

The SPIVA Latin America Scorecard measures the performance of actively managed funds across Brazil, Chile and Mexico against their respective benchmarks over various time horizons, providing statistics on outperformance rates, survivorship rates and fund performance dispersion.

Year-End 2022 Highlights

In a year when the spread between best- and worst-performing Latin American benchmarks spanned more than 35%, underperformance rates among active managers significantly varied by country and asset class.  Managers of equities in Mexico and bonds in Brazil fared better than most, with less than half of funds underperforming their benchmarks.  In all other categories, the majority of active funds underperformed in 2022 and over longer periods (see Exhibit 1).

SPIVA Latin America Mid-Year 2022: Exhibit 1

Mexico

  • The S&P/BMV IRT lost 5.74% during calendar year 2022. The majority of active Mexico Equity fund managers fared well for the year, with less than one-third (28.89%) underperforming the benchmark.  Over longer periods, outperformance was more fleeting, with 68.18%, 67.39% and 85.37% of managers underperforming the benchmark over 3-, 5- and 10-year periods, respectively (see Report 1a).
  • Median active fund outperformance was 2.48% in 2022, but turned negative over longer time horizons, with median funds underperforming by 2.47%, 2.17% and 2.21% for the 3-, 5- and 10-year periods, respectively (see Report 5). Over the 10-year period, even the threshold for top-quartile managers lagged the benchmark by 0.56%.
  • The survival rates of active funds in Mexico remained the highest in Latin America, at 100%, 97.73%, 89.13% and 75.61% over the 1-, 3-, 5- and 10-year periods, respectively (see Report 2); this marked six scorecards in a row that Mexico Equity funds had the highest three- and five-year period survivorship rates.
  • Funds with greater assets performed relatively better than smaller funds in 2022, with average returns for Mexico Equity funds 2.77% higher on an asset-weighted basis than on an equal-weighted basis (see Reports 3 and 4).

Brazil

  • Brazil’s equity market ended 2022 nearly flat for the year, with the S&P Brazil BMI up 0.07% (see Report 3). Large caps, as measured by the S&P Brazil LargeCap, fell 5.38%, outperforming mid- and small-cap companies, as measured by the S&P Brazil MidSmallCap, which finished the year down 10.70%.
  • In 2022, 50.40% of active Brazil Mid-/Small-Cap funds underperformed their benchmark, while a larger majority of active equity funds underperformed their benchmarks in other categories. Meanwhile, 81.21% of Brazil Large-Cap funds and 61.06% of Brazil Equity funds underperformed their benchmarks.  Active managers from all categories, with the exception of Brazil Large-Cap funds, fared poorly relative to their respective benchmarks over the longer 10-year period ending in 2022, with underperformance rates of 89.22%, 80.56% and 87.06% in the Brazil Equity, Brazil Large-Cap and Brazil Mid-/Small-Cap fund categories respectively (see Report 1a).

Chile

  • Chile’s equity market stood out among global peers, with the S&P Chile BMI rising 25.17% for the 12-month period ending Dec. 31, 2022 (see Report 3).
  • The majority of active Chile Equity fund managers underperformed the S&P Chile BMI over all periods studied, but the underperformance rate was especially high over longer time periods, with 80.00% and 95.45% of active funds underperforming the benchmark over the 5- and 10-year periods, respectively (see Report 1a). Funds underperformed the benchmark by medians of 1.83% and 2.70% over the 1- and 10-year periods, respectively (see Report 5).
  • Over the one-year period, fund size was inconsequential to returns, with active Chile Equity funds rising 22.59% and 22.61% on equal-weighted and asset-weighted bases, respectively. Over the 10-year period ending in 2022, however, asset-weighted returns for Chile Equity funds averaged 0.44% while equal-weighted returns averaged 1.01%, indicating a relatively rare case where funds with higher assets generated slightly lower performance than their smaller peers (see Reports 3 and 4).
  • Over the 10-year period, the threshold for top-quartile active fund managers trailed the benchmark by 1.22% (see Reports 3 and 5).

Fixed Income

  • Among active fixed income managers, fewer than half of Brazil Corporate Bond funds and Brazil Government Bond funds underperformed their benchmarks in 2022 (see Report 1a). Brazil Corporate Bond funds and Brazil Government Bond funds outperformed their benchmarks by 1.75% and 1.84%, respectively, on an asset-weighted basis in 2022 (see Reports 3 and 4).  Over longer periods, underperformance rates rose significantly, with 92.75% of Brazil Corporate Bond funds and 94.21% of Brazil Government Bond funds failing to beat their benchmarks for the 10-year period ending in 2022.

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SPIVA MENA Year-End 2022

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

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Joseph Nelesen, Ph.D.

Head of Specialists, Index Investment Strategy

S&P Dow Jones Indices

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Anu R. Ganti

U.S. Head of Index Investment Strategy

S&P Dow Jones Indices

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Grace Stoddart

Quantitative Associate, Index Investment Strategy

S&P Dow Jones Indices

Since the first publication of the S&P Indices Versus Active Funds (SPIVA) U.S. Scorecard in 2002, S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate.

The SPIVA MENA Scorecard measures the performance of actively managed MENA equity funds against their respective benchmarks over various time horizons, providing statistics on outperformance rates, survivorship rates and fund performance dispersion.

Year-End 2022 Highlights

MENA equities plunged in 2022, with the S&P Pan Arab Composite down 5.67%. A majority of funds across all categories outperformed their respective benchmarks over the one-year horizon. MENA Equity funds performed particularly well, with just 18% of funds underperforming the S&P Pan Arab Composite (see Exhibit 1).

SPIVA MENA Year-End 2022: Exhibit 1

MENA 

  • 18% of MENA Equity funds underperformed the S&P Pan Arab Composite in 2022, while 23% underperformed the broader S&P Pan Arab Composite LargeMidCap Index. Funds in this category lost 2.49% and 1.82% on equal- and asset-weighted bases, respectively, over the same period (see Reports 1a, 3a and 3b).
  • As time horizons extended, fund managers lost the ability to outperform in this category, with 91% of MENA Equity funds underperforming both benchmarks over the 10-year period ending in 2022 (see Report 1a).
  • A high rate of attrition plagued the MENA Equity funds category, with only 39% of the funds analyzed surviving the 10-year period (see Report 2).

GCC

  • While the S&P GCC Composite declined 4.78% in 2022, 33% of equity funds focused on the Gulf Cooperation Council (GCC) region underperformed over the past one-year period.

Saudi Arabia

  • Although fewer than half of Saudi Arabia Equity funds underperformed their benchmark in 2022, the category underperformance rate of 46% was the highest among all MENA categories over the one-year period (see Report 1a).
  • Over longer time horizons, the majority of Saudi Arabia Equity funds trailed the benchmark, with underperformance rates of 65%, 75% and 81% over 3-, 5- and 10-year periods, respectively.
  • The survival rates of active Saudi Arabia Equity funds were the highest among all MENA categories, with 88% of funds surviving over the 10-year period.

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