Few top funds maintaining outperformance

The latest S&P Dow Jones Indices Persistence Scorecard of Australian funds has shown new data through to December 2019 on the persistence of active funds outperforming their peers and benchmarks over consecutive periods – what the firm calls a test of fund managers’ skills in different environments. 

Among top-quartile Australian active funds, 14.1 per cent had maintained top-quartile rankings over consecutive three-year periods, while only 1 per cent had managed five-year periods. 

This translated to 29 of the 198 funds that had been in the top quartile at the start of 2017 maintaining their ranking in 2019. Looking at the five year period – there were 197 funds in the top quartile in 2015 – by 2019, there was around one or two that had kept their place.

S&P had compared persistence across Australian equity general funds, Australian equity mid- and small-cap, international equity general, Australian bonds and Australian equity A-REIT.

Top-quartile funds in Australian bonds had the highest performance persistence among all categories, with more than 75 per cent of funds showing performance persistence over two non-overlapping three- and five-year periods. 

Meanwhile funds in the Australian A-REIT category had the lowest tendency to stay in the top quartile over three years.

Over three and five consecutive years, 15.8 per cent and 1.3 per cent of outperforming funds consistently beat their benchmarks respectively. 

“Research suggests that actively managed winning streaks are often short lived,” the report stated.

The Australian equity mid- and small-cap funds had the highest persistence over three consecutive years, but no fund category showed persistent outperformance over five consecutive years. 

Of the 187 Australian active funds that outperformed their benchmarks between December 2013 and December 2016, 47.6 per cent of them failed to outperform in the subsequent three year period and 12.8 per cent were liquidated.

Outperforming funds in the Australian equity A-REIT category had the highest persistence in outperformance during two consecutive three-year periods (57.1 per cent) while only 29.4 per cent of funds in international equity general had consistent outperformance across the non-overlapping periods.

Out of the 258 Australian funds that outperformed in the five-year period ending December 2014, only 27.1 per cent continued to outperform their respective benchmark and 15.9 per cent were merged or liquidated in the following five years (2014-2019).

None of the fund categories exhibited strong performance persistence over the two successive five-year periods, but funds that outperformed in the first five-year period tended to have a lower liquidation rate in the subsequent five years across all categories.