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Persistence is a Rare Commodity

For investors that remain committed to active management, finding consistently top performing managers can be challenging. One problem is, to paraphrase the common disclaimer clause, past performance does not seem to be a reliable indicator of future results.

Recently released data from S&P appears to bear out this statement. The S&P Persistence Scorecard tracks the degree to which mutual funds persist in their relative performance over time. It shows by asset class what percentage of funds performing in the first quartile or top half for a designated period remained in that position in subsequent periods. For those considering relative returns as an indicator of future success, the data tells a story:

For example:
• For all domestic equity funds in the top quartile for 2015: just 35% remained in the top quartile in 2016 and less than 2% of these funds made it to the top quartile in 2017, 2018 or 2019.

• For all domestic equity funds in the top half for 2015, 58% remained in the top half in 2016, but this percentage dropped to just 16% a year later and just 10% by 2019. 

• Over the longer term, for domestic equity funds that were in the top quartile for the five years ending in 3/2014, just 16% remained at the top for the next five year period while 32% dropped to the last quartile for that period.

• For domestic equities in the top half for the five years ending in 3/2014, 38% remained in the top half for the subsequent period while 48% fell to the bottom half. 

These dramatic shifts apply across large-, mid- and small-cap asset classes. 

Finding managers that can consistently produce alpha is an important element in the value provided by wealth managers that use active management or select active managers for specific asset classes. This data is a reminder that quality search and selection processes need to look at factors well beyond relative historical performance rankings.

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