The S&P Persistence Scorecard, released twice a year by McGraw Hill Financial, tracks the consistency of top performers over consecutive yearly periods and measures performance persistence through transition matrices.
"Out of the 687 funds that were in the top quartile as of March 2012, only 3.78 per cent managed to stay there by the end of March 2014," said the report.
S&P Dow Jones Indices' director of global research and design at McGraw Hill Financial, Aye Soe, said the results indicate that an “inverse relationship exists between the measurement time horizon and the ability of top-performing funds to maintain their status”.
By tracking the performance of top and bottom quintile performers over subsequent time periods Ms Soe said the data shows a “likelihood for the best performing funds to become the worst performing funds and vice versa”.
“Of the 426 funds that were in the bottom quartile, 28.64 per cent moved to the top quartile over the five-year horizon, while 28.57 per cent of those top-quartile funds moved into the bottom quartile during the same period.”
Ms Soe said it is also worth noting that “no large or mid-cap funds managed to remain in the top quartile at the end of the five-year measurement period”.
“The figures paint a poor picture of the lack of long-term persistence in mutual fund returns,” she said.
The research also indicated that out of the 687 funds in the top quartile as of March 2012, only 3.78 per cent managed to stay there by the end of March 2014.
Ms Soe noted that only 1.9 per cent of the large-cap funds, 3.16 per cent of the mid-cap funds and 4.11 per cent of the small-cap funds remained in the top quartile.
“Similarly only 3.09 per cent of large-cap funds, 3.6 per cent of mid-cap funds and 5.48 per cent of small-cap funds maintained top-half performance over five consecutive 12-month periods,” she said.
“Random expectations would suggest a repeat rate of 6.25 per cent.”
The research did, however, show consistency in the death rate of bottom-quartile funds.
“Across all market cap categories and all periods studied, fourth-quartile funds had a much higher rate of being merged or liquidated,” said Ms Soe.
“The five-year transition matrix illustrates that 38.31 per cent of large-cap, 39.13 per cent of mid-cap and 45.54 per cent of small-cap fourth-quartile funds disappeared.”
