The Persistence Scorecard
The Short-Lived Success of Active Fund Management
The higher they soar, the harder they fall
Why Pay a Premium for Underperformance?
Making a case for low-cost passive management
Many active fund managers measure their worth and justify their high fees based on their ability to beat the market and outperform their peers. Considering the latest data in the S&P Dow Jones Indices’ “Persistence Scorecard”, however, these claims are short lived. As soon as active fund managers are boasting outperformance in the market over the last year or quarter, they are likely already tumbling fast in terms of performance.
The Persistence Scorecard report shows that very few fund managers can consistently deliver above-average returns over multiple periods. In fact, the data showed that the highest performing funds are actually more likely to become some of the worst performing funds than to stay at the top year after year.
Here are a few key findings in the report, which studied top performing funds over a three-year and five-year period ending in Sept. 2015:
- Of 678 domestic equity funds that were in the top quartile in Sept. 2013, only 29 remained in the top quartile over a two-year period.
- Over a three-year period, fewer than a quarter of the funds in the top quartile were even in the top half.
- Over a five-year period, no large-cap or mid-cap funds remained in the top quartile, and fewer than 6% remained in the top half.
The data clearly indicates that there is a severe lack of persistence in actively managed funds generating high returns over a long period of time. Of 715 funds tracked by the S&P Dow Jones Indices since 2010, only two – AMG SouthernSun Small Cap Fund and the Hodges Small Cap Fund — remained in the top quartile over the next five consecutive years.
Even Michael W. Cook, the lead manager of the AMG SouthernSun Small Cap Fund — which is now closed to new investors – advised investors to lean heavily on passive investments.
“Index funds deserve to be core holdings for many investors,” he said. “One thing you don’t want to do is just read about performance numbers — ours or anybody else’s — and put money into an investment. Chasing past returns doesn’t make sense.”
Active funds charge internal management fees ranging anywhere from 0.6% to 1% in exchange for their “expertise” in selecting funds for clients. Passive investments, such as index funds or ETFs (which typically track indices), on the other hand, skim much less off the top, offering internal management fees as low as 0.1% to 0.2%.
The numbers tell it all. Outperformance among active funds is rarely sustainable. So why do so many investors rely so heavily on high-priced active fund managers instead of letting the markets deliver better returns at a lower rate, as they historically do? Perhaps its the thrill of the chase, conviction in some “get rich quick” scheme, or force of habit. In any case, this report reveals that reliance on actively managed funds over a long period of time is much like one’s chances of winning the lottery – few and far between.
If you are a long-term investor saving for retirement or a child’s college education, this data is an important reminder not to get wrapped up in the hype of active fund management no matter how enticing it may seem at the moment. For steady, long-term gains with low fees, stick with a proven passive investment strategy and rest easy knowing your nest egg or savings are secure.