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This article originally appeared on ETF.COM here.
[timeless]
Q2 hedge fund letters, conference, scoops etc
Since 2002, S&P Dow Jones Indices has published its biannual Indices Versus Active (SPIVA) reports, which compare the performance of actively managed equity funds to their appropriate index benchmarks. It also puts out a pair of scorecards each year that focus on persistence of performance.
This is an important issue, because if persistence is not significantly greater than should be expected at random, investors cannot separate skill-based performance (which might be able to persist) from luck-based performance (which eventually runs out).
Following are some of the highlights from the just-released July 2018 persistence scorecard, with data through March 2018:
- Out of 557 domestic equity funds in the top quartile as of March 2016, only 2.3% managed to stay in the top quartile at the end of March 2018. Furthermore, only 0.9% of the large-cap funds, no midcap funds and 3.9% of the small-cap funds were able to remain in the top quartile over that period. Given that, randomly, we would expect 6.3% to do so, we have evidence both that it’s hard to separate skill from luck in fund performance and relying on past performance is a fool’s errand.
- Over three-consecutive 12-month periods ending March 2018, 22.1% of large-cap funds, 7.6% of midcap funds and 13.5% of small-cap funds maintained a top-half ranking.
- Randomly, we would expect 25% to do so.
- Only 11.4% of large-cap funds, 1.2% of midcap funds and 3.6% of small-cap funds maintained top-half performance over five-consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.3%.
The bottom line is that, basically, there was no evidence of persistence in performance greater than randomly expected among active equity managers. Making matters worse is that a stronger likelihood existed of the best-performing funds becoming the worst-performing funds than vice versa.
Other angles
Of 364 U.S. equity funds in the bottom quartile, 17% moved to the top quartile over the five-year horizon, while 25.8% of the 364 funds in the top quartile moved to the bottom quartile during the same period.
The one area in which the report found evidence of persistence was that across all market-cap categories, funds in the worst-performing quartile were much more likely to be liquidated or merged out of existence, highlighting the importance of making sure that survivorship bias isn’t present in the data.
The five-year transition matrix shows that 33.8% of large-cap funds, 34% of midcap funds and 29.1% of small-cap funds in the bottom quartile disappeared.
Results for fixed-income funds were marginally better. For example, over the five-year measurement horizon, the report documented a lack of persistence among top-quartile funds in most fixed-income categories, but with a few exceptions.
Of 13 fixed-income categories, funds investing in long-term government bonds, long-term investment-grade bonds, short-term investment-grade bonds, mortgage-backed securities, general municipal debt and California municipal debt were the only six groups for which the report observed a noticeable level of persistence. In the remaining seven categories, the top quartile contained no fixed-income funds with five years of persistence.
Read the full article here by Larry Swedroe, Advisor Perspectives
