INTRODUCTION
- When it comes to the active versus passive debate, one key dimension is the ability of a manager to deliver above-average returns over multiple periods. The ability to consistently outperform is one way to differentiate a manager’s skill from pure luck.
- In this report, we measure the performance persistence of active funds in Brazil, Chile, and Mexico that outperformed their peers over consecutive three- and five-year periods. We also analyze their performance ranking transition matrices over subsequent periods. Due to increased data availability, the scorecard now contains five-year transition matrices.
SUMMARY OF RESULTS
Brazil
- The inability for top-performing managers to replicate their success in the following years across all five categories. After four years, we observe that no managers remained in the top quartile for four of the five categories. Corporate bonds was the outlier, as 33% of managers remained in the top quartile by the end of 2018.
- The five-year transition matrix in Exhibit 5 shows a mixed bag of results. For the three equity categories, when taking into account the large percentage of funds that were merged or liquidated in the second period, most top quartile managers in the first period were unable to repeat their success in the second period. For the fixed income categories, top-performing funds from the first period generally did well in the second period, as most were placed in the first or second quartile. However, this success is diluted when considering that 50% of first quartile corporate bond funds and 27% of first quartile government funds were merged or liquidated between the first and second periods.
Chile
- We tracks the persistence of the top-performing funds in 2014 by counting how many remain in the top quartile over the subsequent four calendar years. After one year, 36% of funds remained in the top quartile, with that figure dropping to 9% (or one fund in total) by year two. By the third year, no funds remained in the top quartile, showing a clear lack of manager performance persistence when measured on a yearly basis.
- The five-year transition matrix in Exhibit 5 shows that funds that were in the first quartile after the first five-year period did relatively well in the second five-year period, with most ranked in the top two quartiles. However, we also see that in total, half of the first quartile funds from the first period were merged or liquidated in the second period, which paints quite a different picture of overall quartile performance.
Mexico
- Just 3 out of the 11 funds that were ranked in the top quartile in 2014 remained in the top quartile in 2015. Beyond 2015, none of the funds remained in the top quartile. If we relax the testing to the top half of managers in 2014, about 50% of the funds sustained top half performance in 2015. As time progressed, the percentage of managers remaining in the top half dropped, eventually hitting 0% by 2018.
- For longer-term performance comparison, we look to the five-year transition matrix. Of the managers ranked in the first quartile in the first five-year period, 75% remained in the top two quartiles in the second period. Similarly, 63% of the second quartile managers in the first period remained in the top two quartiles in the second period. Funds ranked in the third and fourth quartiles in the first period generally repeated their poor performance in the second period.
