Summary
As readers of our SPIVA® Scorecards know, active management is challenging. But identifying outstanding managers can be equally, if not more, challenging. 2023 was an unusual year—despite the headwind of a rising market and mega-cap strength, only 60% of all active large-cap U.S. equity funds underperformed the S&P 500®, slightly better than the long-term average of 64%.
Last year's relatively benign results notwithstanding, the Persistence Scorecard helps explain why consistent outperformance is typically fleeting. Among top-quartile funds within all reported active domestic equity categories as of December 2019, not a single fund remained in the top quartile over the next four years (see Report 2).
Exhibit 1 illustrates that the percentage of top-half actively managed domestic equity funds consistently remaining in the top half over a five-year period (see Report 2) was less than a random distribution would suggest, evidence that active outperformance, when it occurs, tends to be the result of luck rather than genuine skill.
Report Highlights
− A small fraction of actively managed equity funds managed to maintain consistent outperformance relative to their peers over the three- or five-year periods ending in December 2023.
− None of the top-quartile large-cap funds from 2021 maintained their position in the top quartile for the subsequent two years, compared to an expected 6.25% based on random chance (see Report 1).
– Only 7% of the above-median large-cap active equity funds in calendar year 2021 remained above median in each of the two succeeding years. If outperformance were entirely random, we would expect a repeat rate of approximately 25% (see Report 1).
– Results were more promising further down the capitalization spectrum. Small-cap equity funds fared relatively better than what would be expected under a random distribution, with 10% of top-quartile funds from 2021 maintaining their status for the next two years. Meanwhile, 36% of above-median small-cap funds stayed in the top half over the same period (see Report 1).
– Alpha persistence was just as fleeting as maintaining consistent good peer group rankings, with a cross-category average of only 12.8% of active equity funds that surpassed the benchmark in 2021 able to consistently outperform their respective benchmarks over the subsequent two-year period (see Report 1b).
– Results for active fixed income managers were mixed but generally better than for their equity counterparts, and above the level suggested by chance. 20% of top-quartile Investment Grade Intermediate and 8% of High Yield funds in calendar year 2021 remained in the top quartile in each of the two succeeding years (see Report 7).
– Performance persisted at the other end of the performance spectrum, as illustrated by the fact that 27% of all fourth quartile domestic U.S. equity funds (based on 2013-2018 performance) were either merged or liquidated within the subsequent five years. The comparable figure for top-quartile funds was only 10%. We observe similar results for active fixed income funds (see Reports 5 and 11). In every single reported equity and fixed income category, the worst-performing quartile over the previous five years saw the highest (or joint-highest) proportion of funds that were subsequently merged or liquidated over the next five years.
