Besides tracking active fund performance over time in their long-running SPIVA series, Standard and Poor's market researchers also compare the consistency — or, more to the point inconsistency — of top-performers in subsequent years. 

In looking at the past 10 years (through 2023), the latest S&P U.S. Persistence Scorecard reviewed stock fund managers who produced above-median category results in the initial five years. Then, researchers calculated what fraction of that initial set of managers repeated their top-half performances in the second five years. (See chart below.)

If performances were completely random, we would expect 50% of the winners in the first five years to also win in the second five years. But the study's authors noted that "the percentage of top-half actively managed domestic funds consistently remaining in the top half over a five-year period was less than a random disbrituion would suggest." They concluded this was "evidence that active outperformance, when it occurs, tends to be the result of luck rather than genuine skill." 

The Persistence Scorecard's analysis revealed these performance lags increased as time passed. As shown in the following pie charts, by the final year studied (2023) almost all (98.04%) domestic large-cap equity funds with top-half returns in the initial five years had slid into the bottom half of category performance. For all U.S. small-cap stock funds, 98.05% of recent former leaders weren't able to produce above-median returns by the end of the second five-year period. 

And that's even after adjusting for such shenanigans as survivorship bias and style drift. It's also starting from a rather low statistical bar — i.e., those that made it into the top half as opposed to top quartile. Also, U.S.-domiciled active managers were measured relative to their fund category peers, not their respective indexes.

To some investors, the S&P's Persistence Scorecard results might seem a bit counterintuitive. After all, if fund managers were skillful at consistently picking individual stock winners, then they should remain in the top half without much difficulty. Still, the data shows such an assumption clearly didn't turn out to be the case during the extended period studied in the four major equity fund categories reviewed.

The chart below gives a breakdown of the S&P U.S. Persistence Scorecard's results on a year-by-year basis. It presents an even more sobering picture. In particular, notice how quickly one-year performance bursts by active stock fund managers eroded as larger data sets — i.e., longer timeframes — were taken into account.

Even refining such an analysis to just the top outperformers — those equity fund managers whose funds scored in the top quartile of their peers' overall results — wound up showing steep declines from the first year through subsequent years. 

The chart below, which uses S&P data, provides more evidence that any short-term outperformance by active stock pickers is based primarily on luck, not skill.

S&P researchers observed in their latest report "the phrase 'past performance is no guarantee of future results (or some variation thereof) can be found in the fine print of most mutual fund literature." They added: "Yet many investors and advisors consider past performance and related metrics to be important factors in fund selection." 

Whether we're reviewing ETFs or mutual funds, IFA's Portfolio Monitoring Report (PMR) tends to de-emphasize raw return data in scoring funds. Generally, our fund analysis and selection processes stress application of risk metrics such as the Sharpe ratio and standard deviation.

Also, IFA's PMR highlights diversification in holdings as well as less style drift and lower turnover rates — factors that aren't always recognized by investors as key to evaluating a fund's implicit (and explicit) costs of ownership. (You can read a more detailed analysis of how IFA reviews and selects funds by clicking here.)

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