Worth Reading

Worth ReadingAs I have noted any number of times, every piece of marketing in the investment world includes a disclaimer of this sort: Past performance is not indicative of future results. Meanwhile, if it is in any way remotely positive, every sales pitch for the products which are the subject of the disclaimer puts enormous emphasis on past performance. This bit of cognitive dissonance is put into sharp relief by the issuance of the most recent S&P Persistance Scorecard. This Scorecard is released twice per year to track the consistency of top mutual fund performers over yearly consecutive periods and to measure performance persistence through various transition matrices. As usual, this new edition confirms the accuracy of the disclaimer as opposed to the sales pitch.

While I heartily recommend that you read the entire report, some highlights follow.

  • Of the 692 funds that were in the top quartile as of September 2011, only 7.23 percent managed to stay in the top quartile at the end of September 2013. Similarly, 5.28 percent of the large-cap funds, 10.31 percent of the mid-cap funds and 8.15 percent of the small-cap funds remain in the top quartile.
  • For the three years ended September 2013, 19.25 percent of large-cap funds, 20.1 percent of mid-cap funds and 26.8 percent of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. It should be noted that random expectations would suggest a rate of 25 percent and small-cap funds was the only category to exceed the repeat rate.
  • Looking at longer-term performance, only 7.71 percent of large-cap funds, 0.88 percent of mid-cap funds and 9.9 percent of small-cap funds maintained a top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.25 percent.
  • While top-quartile and top-half repeat rates have been at or below the levels one expects based on chance, there is consistency in the death rate of bottom-quartile funds. Across all market-cap categories and all periods studied, fourth-quartile funds had a much higher rate of being merged and liquidated.



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