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SPIVA Australia Year-End 2020

Latin America Persistence Scorecard: Mid-Year 2020

Australia Persistence Scorecard: Mid-Year 2020

Canada Persistence Scorecard: Mid-Year 2020

U.S. Persistence Scorecard Mid-Year 2020

SPIVA Australia Year-End 2020

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Tim Wang

Senior Analyst, Global Research & Design

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Priscilla Luk

Managing Director, Global Research & Design, APAC

SUMMARY

  • S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the SPIVA® U.S. Scorecard in 2002. Over the years, we have built on our 18 years of experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.
  • The SPIVA Australia Scorecard reports on the performance of Australian active funds against their respective benchmark indices over different time periods. In this scorecard, we evaluated returns of over 897 Australian equity funds (large, mid, and small cap, as well as A-REIT), 475 international equity funds, and 112 Australian bond funds.
  • Strong recovery was seen in equity markets after sell-offs in February and March 2020. Apart from Australian A-REIT funds, the majority of active funds across various equity fund categories, Australian Equity General, Australian Equity Mid- and Small-Cap, and International Equity General, outperformed their respective benchmarks in the second half of 2020.
  • Average Australian Bond funds started outperforming the benchmark since April 2020. In the second half of 2020, more than 80% of Australian Bond funds beat the S&P/ASX Australian Fixed Interest 0+ Index with an equal-weighted average excess return of 0.7%.

SPIVA Australia Year-End 2020 - Exhibit 1

  • Australian Equity General Funds: The S&P/ASX 200 gained 13.2% in the second half of 2020, while Australian Equity General funds enjoyed higher returns of 14.6% and 15.0% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending December 2020, only 39.3% and 55.6% of funds were beaten by the benchmark, respectively, which were much lower than the observations over the 3- and 5-year horizons.  However, over 7% of funds in this category were liquidated in 2020.
  • Australian Equity Mid- and Small-Cap Funds: The S&P/ASX Mid-Small had a strong return of 21.7% in the second half of 2020, while the Australian Equity Mid- and Small-Cap funds recorded bigger gains. Funds with smaller assets tended to suffer more losses during the first half of 2020, but they tended to perform better during the recovery in the second half, with the equal-weighted returns exceeding the asset-weighted return by more than 1%.  Over the 6- and 12-month periods ending December 2020, 34.1% and 53.0% of funds failed to outperform the benchmark, respectively.
  • International Equity General Funds: The international equity market recorded smaller gains than the Australian equity market in the second half of 2020. The S&P Developed Ex-Australia LargeMidCap marked a return of 10.2% and more than half of the International Equity General funds outperformed the benchmark over this period.  Over the 6- and 12-month periods, the equal-weighted returns exceeded the asset-weighted returns by 1.7% and 2.3%, respectively, indicating funds with smaller assets tended to perform better than their peers with larger assets in the past year.
  • Australian Bond Funds: The S&P/ASX Australian Fixed Interest 0+ Index recorded a narrow gain of 0.9% in the second half of 2020, though the Australian Bond funds recorded higher returns of 1.6% and 1.8% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending December 2020, only 16.7% and 39.4% of funds underperformed the benchmark in this category, which was the most favorable among active funds across all SPIVA fund categories.
  • Australian Equity A-REIT Funds: The S&P/ASX 200 A-REIT gained 21.2% in the second half of 2020, though more than half of the Australian Equity A-REIT funds underperformed the benchmark, recording slightly smaller returns of 20.7% and 20.4% on equal- and asset-weighted bases, respectively. In 2020, 54.5% of funds in this category did not outperform the benchmark and the equal- and asset-weighted average returns lagged the benchmark return by 1.3% and 1.7%, respectively.
  • Fund Survivorship: In 2020, the overall fund liquidation rate across all categories was 6.1%, which was higher than the rate of 3.5% in 2019. The highest liquidation rates were seen in the Australian Equity General and Australian Equity A-REIT fund categories.  In 2020, 7.1% of Australian Equity General funds were liquidated, compared with 1.8% in 2019.  The liquidation rate of Australian Equity A-REIT funds was 7.6% in 2020, much higher than the rate of 2.9% recorded in 2019.

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Latin America Persistence Scorecard: Mid-Year 2020

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María Sánchez

Director, ESG Index Product Strategy, Latin America

INTRODUCTION

  • In the active versus passive investment debate, a manager’s ability to deliver consistently above-average returns is key. Persistence in performance is one way to differentiate skill from 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 how their performance ranking changed over subsequent periods.

SUMMARY OF RESULTS

Brazil

  • The percentage of Brazil Equity Funds and Brazil Large-Cap Funds top performers that remained in the top quartile after 12 months fell drastically compared with the previous report (from 33% to 13% and 33% to 19%, respectively), as shown in Exhibit 1.
  • Exhibit 2 highlights the inability of top-performing equity fund managers to consistently replicate their success in subsequent years.
  • Among fixed income funds, Brazil Government Bond Funds had similar results to Brazil Equity Funds. Brazil Corporate Bond Funds performed slightly different; while the majority of managers did not maintain consistent outperformance for five years in a row, a notable 21% of them did (see Exhibit 2).
  • The five-year transition matrix (see Exhibit 5) highlights three categories: equity, large-cap equity, and government bond funds. The chance of a winning fund remaining in the top quartile after five one-year periods was higher than the chance of it liquidating.
  • Half of the top-quartile funds in the Brazil Corporate Bond Funds category remained in the top quartile and the other half were merged or liquidated (see Exhibit 5).

Chile

  • A majority of Chilean top-performing equity funds (56%) stayed in the top quartile for two consecutive years, but just 11% stayed the third year (see Exhibit 1).
  • Exhibit 2 demonstrates the lack of persistence by equity managers in Chile—just 10% of top performing funds in the first 12-month period repeated their outperformance after three years. None of the top-performing funds persisted after five years.
  • Top-quartile managers in the first period of the three-year transition matrix that maintained their top-quartile status in the second period were more likely to stay in the first quartile (44%) than to move to lower quartiles (see Exhibit 3).
  • The five-year transition matrix showed a lack of resilience among managers in the second quartile, with 70% of Chile Equity Funds being merged or liquidated (see Exhibit 5).

Mexico

  • Of the funds in the Mexico Equity Funds category, 17% stayed in the top quartile for three consecutive years (see Exhibit 1).
  • The five-year performance persistence test (see Exhibit 2) shows that top-quartile managers had difficulty replicating their outperformance in subsequent years. For the first and second one-year periods, just 9% of managers remained in the top quartile, and by the third year, none of them remained.
  • Exhibit 6 shows that top-half managers in the first five-year period were resilient; 93% of them survived in the second five-year period.

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Australia Persistence Scorecard: Mid-Year 2020

EXECUTIVE SUMMARY

  • While comparing active funds against a benchmark index is a typical practice used to evaluate their performance, persistence is an additional test that reveals fund managers’ skills in different market environments.
  • In this report, we measure the performance persistence of active funds that outperformed their peers and benchmarks over consecutive three- and five-year periods, and we analyze their transition matrices over subsequent periods.
  • A minority of Australian high-performing funds persisted in outperforming their respective benchmarks or consistently stayed in their respective top quartiles for three consecutive years, and even fewer maintained these traits consistently for the five-year period.

  • Out of the top-performing funds in the 12-month period ending June 2016, only 1.0% persistently maintained a top-quartile rank, and 2.0% consistently beat their benchmarks in the following four consecutive years.
  • Over two successive three- and five-year periods, the majority of outperforming funds failed to persistently beat their respective benchmarks, and most funds in the top quartile did not stay there consistently.
  • Out of the 166 Australian funds that ranked in their respective top quartile in the five-year period ending June 2015, only 31.3% of them remained in the top quartile, and 11.4% were liquidated or merged in the subsequent five-year period.
  • Out of the 258 Australian funds that outperformed their respective benchmark in the five-year period ending June 2015, only 28.7% continued to outperform their respective benchmark in the following five-year period, and 14.7% of them were liquidated.
  • Overall, the majority of Australian fund categories showed weak performance persistence in top-performing funds across the three- and five-year periods.


Canada Persistence Scorecard: Mid-Year 2020

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Berlinda Liu

Director, Multi-Asset Indices

Our widely followed SPIVA® Canada Scorecard repeatedly shows that most Canadian active managers underperform their benchmarks most of the time. However, if an active manager beats a benchmark, how do we know whether the result is a product of genuine skill or merely of good luck? Genuine skill is likely to persist, while luck is random and can soon dissipate.

The Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers’ success. The inaugural Canada Persistence Scorecard shows that, regardless of asset class or style focus, few Canadian fund managers have consistently outperformed their peers.

For example, of the Canadian Equity funds that finished in the top quartile in terms of cumulative returns for the period from June 2010 to June 2015, only 8.3% finished in the top quartile for the period from June 2015 to June 2020. In fact, it was more likely for a top-quartile fund to close its doors or change style (25% combined) than to remain in the top quartile.

Canada Persistence Scorecard Mid-Year 2020 - Exhibit 1

Even when using a less-restrictive metric for success, just 37.5% of Canadian Equity funds in the top half of the distribution for the period from June 2010 to June 2015 managed to repeat their top-half performance over the next five years.

This was hardly an outlier for any category or time period. Three-year transition matrices showed that in only one category (Global Equity) did more than 50% of funds repeat their top-half performance from the June 2014 to June 2017 period in the subsequent three years.

When looking at annual consistency, in five out of the seven categories tracked, none of the funds in their category’s top quartile in June 2016 maintained that status annually through June 2020. Over shorter time periods, no International Equity or U.S. Equity fund even managed to retain their top-quartile status for the next two years.

Some statistically minded readers might find support for the notion that fund performance is not randomly distributed. For example, the odds that a fund could remain in the top quartile for n consecutive years might be calculated as (25%)n = 25%, 6.25%, 1.56%, and 0.39% for one, two, three, and four years, respectively. While the persistence numbers in Reports 1 and 2 did intermittently top these thresholds, they remained quite low on an absolute basis. As such, while the Persistence Scorecard has not proven that fund performance is completely random, from a practical or decision-making perspective, it has reinforced the notion that choosing between active funds on the basis of previous outperformance can be a misguided strategy.

Unsurprisingly, the one pattern that did hold across categories was the tendency of the poorest funds to close. Calculating across all categories, there were 458 funds tracked over the period from June 2010 to June 2015. Observing their fates through June 2020, while just 8.6% of top-quartile funds ended up closing, 40.5% of funds in the bottom quartile did so. Seemingly coming in for the most opprobrium from their investors, 76.2% of bottom-quartile Canadian Focused Equity funds disappeared.

Style changes did not appear to be correlated with fund performance. Top, middle, and bottom performers within a category all generally had similar chances of style drift over the three- or five-year periods. Over the five-year period, Canadian Dividend & Income Equity funds had the highest percentage of style change (8.5%), with International Equity funds leading the way over the three-year period (5.4%).

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U.S. Persistence Scorecard Mid-Year 2020

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Berlinda Liu

Director, Multi-Asset Indices

SUMMARY

Do investment results come from skill or luck?  Genuine skill is likely to persist, while luck is random and fleeting.  Thus, one measure of active management skill is the consistency of a fund’s performance relative to its peers.

The Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers’ success.  This report shows that, regardless of asset class or style focus, active management outperformance is typically short-lived, with few fund managers consistently outperforming their cohorts.

For example, of the domestic equity funds that finished in the top half in terms of cumulative returns for the period from June 2010 to June 2015, 38.6% replicated that accomplishment during the period from June 2015 to June 2020.  In fact, it was more likely for a top-half fund to close its doors or change its style (41.5% combined) than repeat its performance in the top half (see Report 6).

U.S. Persistence Scorecard Mid-Year 2020 - Exhibit 1

At first glance, there were some signs of performance persistence when narrowing the measurement intervals to consider annual consistency.  Of the top-quartile domestic equity funds in June 2018, 35.5% managed to stay in the top quartile annually through June 2020 (see Report 1).

However, this persistence was inconsistent and decayed over time.  Rewinding the clock two years, just 1.6% of domestic equity funds in the top quartile as of June 2016 maintained that status annually through June 2020.  Widening the filter to funds in the top half, 15.8% of domestic equity funds maintained that status in each of the next four years (see Report 2).

Some statistically minded readers might note that these numbers are better than what would be expected if fund performance was randomly distributed.  For example, the odds that a fund could remain in the top quartile for four consecutive years might be calculated as (25%)4 = 0.39%, and the 1.6% referenced above is substantially better than that.  While the persistence report may not prove that fund performance is completely random, from a practical or decision-making perspective, it reinforces the notion that choosing between active funds on the basis of previous outperformance is a misguided strategy.  After all, there remains a 98.4% chance that a top-quartile fund will not stay in the top quartile for the next four years.

There were few patterns to be found among equity funds, as the non-repeatable distribution of fund performance over various time frames covered large-, mid-, small-, and multi-cap focused funds.  One salient illustration of the lack of persistence was that none of the 71 top-quartile mid-cap funds from June 2016 remained in the top quartile annually through June 2020 (see Report 2).

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