The Dispatch

Report Reveals Insights Into Fund Performance Persistence

The S&P Dow Jones Indices Scorecard Persistence Report 2022 (“S&P Report”) provides valuable insights into the persistence of active fund managers' performance. This paper aims to highlight some of the significance of the S&P Report and its implications for investors selecting funds.  It also may serve as a reminder that past performance is not guaranteed going forward; furthermore, relatively strong past performance may actually be indicative of future relative weakness. By evaluating the performance of actively managed funds over extended periods, the S&P Report enables investors to make informed decisions based on objective data and identify fund managers that add value more consistently than others.

The S&P Report is a comprehensive analysis of the performance persistence exhibited by actively managed funds. By examining fund performance across various asset classes, the S&P Report offers investors a deep understanding of the consistency and skill of fund managers over time.

Key findings in the report are based on statistical analysis and evaluation of fund performance. It highlights the probability of active manager ability to consistently outperform respective benchmarks. The findings help investors assess the potential for long-term success when selecting active fund managers.

The S&P Report focuses on long-term performance evaluation, considering three-, five-, and 10-year horizons, providing investors a comprehensive view of fund manager ability to generate alpha and consistently outperform benchmarks. By evaluating performance over extended periods, investors can identify fund managers with sustained skill rather than relying on short-term outperformance that may have been achieved through factors other than skill that will endure.  EQIS takes findings such as these into account when seeking managers.  The focus is to find managers that have repeatable, understandable processes which are more likely to add excess return when in favor, rather than seeking the top quintile managers of the past.

The S&P Report can assist in fund selection and portfolio allocation. Investors can compare the performance of actively managed funds against relevant market indices, allowing them to assess the likelihood of a fund's continued outperformance. The report also aids in choosing between active and passive investment strategies based on historical performance data.

Key findings from the S&P Dow Jones Indices Scorecard Persistence Report 2022:

• For domestic equity funds, only a small percentage of active fund managers consistently outperformed benchmarks over the ten-year period.
• The percentage of active managers that consistently outperformed benchmarks was slightly higher for international equity funds compared to domestic equity funds.
• Small-cap funds showed the lowest level of persistence, with a higher proportion of active managers failing to consistently outperform benchmarks compared to mid-cap and large-cap funds.
• The probability of active managers consistently outperforming benchmarks varied between growth and value styles.

The S&P Report can be a useful tool for investors. By evaluating the persistence of active fund manager performance over long periods, the report enables investors to make informed decisions based on objective data. The report's findings may lead investors to adjust their investment selection and portfolio construction priorities. Understanding the challenge of creating a portfolio of managers that consistently outperform, investors may be better served focusing more on asset allocation and other aspects of portfolio management.  Most will find it better to focus on allocating an optimized portfolio which aligns investment choices with investor objectives and risk tolerance while ensuring that each component is included for specific exposure and purpose rather than attempting to select the “best” manager in each asset class. Also, the result may help advisors focus on the total portfolio more than past manager performance based on the fleeting nature of outperformance.

The full S&P Report is available to download.