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SPIVA Institutional Scorecard Year-End 2022

Australia Persistence Scorecard: Year-End 2022

Canada Persistence Scorecard: Year-End 2022

Latin America Persistence Scorecard Year-End 2022

Europe Persistence Scorecard: Year-End 2022

SPIVA Institutional Scorecard Year-End 2022

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Tim Edwards

Managing Director and Global Head of 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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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

In this report, we add institutional accounts to the mutual funds analyzed in the S&P Indices versus Active (SPIVA) U.S. Scorecard.  We aim to provide the institutional community with the ability to judge managers’ true skill without the possible distortions that fees may create and to illustrate the similarities and differences between the performance of open-end funds and segregated institutional accounts across categories.

This edition of our scorecard shows that underperformance rates over the long term among institutional equity accounts are generally similar to those of mutual funds, with or without fees.  However, the importance of fees in determining underperformance rates varied considerably across asset classes, with a more significant difference in fixed income categories (see Exhibit 1).

Institutional SPIVA Scorecard: Exhibit 1

Report Highlights

Overall, 2022 continued to demonstrate better long-term net-of-fees performance in institutional accounts than in mutual funds, with lower 10-year underperformance rates in all 21 reported equity segments (see Section I and Exhibit 3) and a significant improvement in the cross-category average across fixed income categories (see Exhibit 1). 

Shorter-term horizons show a broader range of outcomes, with some pockets of admirable performance.  Within U.S. equity institutional accounts, only 39% of All Large-Cap Funds underperformed the S&P 500® in 2022 on a gross-of-fees basis, the lowest underperformance rate for the category since this report’s inception in 2015 (see Report 1, Section II).  Active fixed income managers posted even stronger relative performance in 2022, with majority outperformance reported in 12 out of 17 categories.  Notably, just 9% of managers in the inflation-linked category underperformed the iBoxx TIPS Inflation-Linked Index (see Report 11, Section II).

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Australia Persistence Scorecard: Year-End 2022

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 relative performance.  The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance is typically relatively short-lived.

Almost no Australian funds remained in the top performance quartile within their category over five consecutive years, and none did so in four out of five reported fund categories (see Report 2).

Lowering the bar from the top quartile to the top half did not result in a significant improvement in persistence.  As Exhibit 1 illustrates, the decline in persistence across categories was consistently worse than would be expected under a random distribution.

Exhibit 1 - Australia Persistence Scorecard: Year-End 2022

Report Highlights

  • A minuscule percentage of actively managed equity, A-REIT and fixed income funds succeeded in maintaining consistent outperformance relative to their peers over the three- and five-year periods ending in December 2022. Persistence of alpha was rare as well: 149 Australian Equity General funds (out of a total of 346) outperformed the S&P/ASX 200 as of December 2020, and only 28 of those 149 winners—less than one-fifth—managed to continue outperforming annually through December 2022 (see Report 1b).
  • Of the actively managed International Equity General and A-REIT funds whose 12-month performance placed them in in the top quartile of their respective category as of December 2020, not a single fund maintained its top-quartile performance over the next two 12-month intervals. Extending the analysis to five consecutive years made no difference (see Report 1a and Report 2).
  • There was less conclusive evidence for or against persistence when measured over non-overlapping three-year intervals, in which the cross-category average chance of a top-quartile fund remaining in the top quartile was 25%. Extending the horizon to two consecutive five-year periods improved the average slightly to 33% (see Reports 3 and 5).
  • Poor performance continues to be an indicator of future fund closures. Across the five categories reported by our scorecard, an unweighted average of 44% of actively managed funds whose performance placed them in the bottom quartile of performance in the five years ending in December 2017 were subsequently merged or liquidated over the next five years (see Report 5).

Canada 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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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

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 evaluates consistency and shows that in every style and geographic focus, active management outperformance diminishes over time, with few funds consistently outranking their peers.

Canadian equity indices suffered sharp declines in the first half of 2022, followed by fluctuations in the second half before finishing the year slightly negative.  Canadian Equity funds fared better than usual, with only 52% underperforming over the one-year period.  Among all Canadian domestic equity funds ranked in the top quartile of performance over the 12-month period ending December 2018, none maintained a top-quartile position for the next four years (see Report 2).

Canada Persistence Scorecard Year-End 2022: Exhibit 1

Exhibit 1 shows that among Canadian Equity funds ranked in the top half of peer rankings over the five-year period ending December 2017, 45% remained in the top half, while 55% fell to the bottom half, merged/liquidated or changed investment styles (see Report 6).

Report Highlights

− While slightly more than expected actively managed domestic equity funds maintained their top-quartile ranking for a few 12-month periods, persistence of ranking soon fell below what would be expected by random chance. Over five years, none were able to maintain their top-quartile ranking (see Report 2).

− Among actively managed domestic equity funds with top-quartile performance over the 12-month period ending December 2020, 9% of Canada Equity funds and 6.7% of Canada Dividend & Income Equity funds maintained top-quartile performance over the subsequent two 12-month intervals. In every other category, no funds maintained top-quartile performance over three 12-month periods (see Report 1).

− Across a five-year horizon, evidence of persistent active fund outperformance was nonexistent. Within the group of active funds achieving top-quartile performance in their respective categories over the 12-month period ending December 2018, not a single fund remained in the top quartile through each of the subsequent one-year periods through December 2022 (see Report 2).

− Over discrete five-year periods, a greater-than-expected proportion of funds in two domestic equity and three international equity categories maintained their relative performance standing compared with their peers. If performance were purely random in terms of comparing funds to their peers, one would expect 25% of top-quartile funds to remain in the top quartile in a subsequent period.  Our scorecard reports an unweighted average of 40% of top-quartile Canadian Equity, 41% of top-quartile Canadian Focused Equity funds, 50% of top-quartile Global Equity funds, 31% of top-quartile International Equity funds and 46% of top-quartile U.S. Equity funds remained in the top quartile over two consecutive five-year periods (see Report 5).

− Underperformance significantly increased the risk of fund closures. For example, across all actively managed equity funds in four domestic categories (Canadian Equity, Canadian Focused Equity, Canadian Dividend & Income Equity and Canadian Small/Mid-Cap Equity) that were in the bottom half of performance in the five-year period ending in December 2017, more than 35% were subsequently merged or liquidated over the next five years.  In contrast, among all funds in the top half across those same four categories for the five-year period ending December 2017, less than 18% were liquidated or merged in the subsequent five-year period (see Report 6).

− While liquidation was a more likely outcome for lower-ranked funds, style changes shared no strong relationship with underperformance. Over five-year horizons for all four domestic equity categories, the highest rate of style change, at 21%, actually occurred within the top-quartile Canadian Dividend & Income Equity funds.  The average rate of style changes across all categories for top-quartile funds was 8%, while for bottom-quartile funds it was 5% (see Reports 5 and 6).

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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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