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High-performing funds struggle to beat benchmarks

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Only 4 per cent of Australia’s top-performing active funds managed to beat their benchmarks over five consecutive years.

Most active funds that have previously outperformed their peers and benchmarks are unable to maintain this outperformance in subsequent years, new analysis by S&P Dow Jones Indices has revealed.

The firm looked at how Australian active funds that ranked in the top quartile for performance in 2017 and 2019 fared over the following three and five year periods.

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Funds within the categories of Australian equity general, Australian equity mid and small-cap, international equity general, Australian bonds and Australian equity A-REIT were all evaluated against both their peers and their respective benchmarks.

Only 4.4 per cent of the 388 outperforming funds from 2017 continued to outperform their benchmark in each of the four consecutive years through to 2021. 

“While comparing returns against a benchmark is a common practice to evaluate the performance of active funds, performance persistence is an additional test of the fund managers’ skills at overcoming different market environments,” explained S&P Dow Jones Indices MD of global research & design Priscilla Luk and senior analyst Tim Wang.

Funds in the Australian equity mid and small-cap category demonstrated the highest outperformance (14.7 per cent) while none of the funds in the Australian bonds category managed to outperform over the five consecutive years.

Meanwhile, 29.4 per cent of the 337 active funds that outperformed in 2019 were able to maintain their outperformance during the following two years.

“Outperforming funds in the Australian equity general category had the highest persistence (39.4 per cent) in outperforming the benchmark, while international equity general funds had the least consistency of outperformance (3.7 per cent) over three consecutive years,” Ms Luk and Mr Wang said.

S&P Dow Jones Indices found that only 3.0 per cent of funds that ranked in the top quartile for performance in 2017 held on to this ranking in the four consecutive years. 

Australian equity A-REIT funds had the highest rate of performance persistence (6.3 per cent) while no funds in the categories of Australian equity mid and small-cap, and Australian bonds outperformed across the five year period.

The firm also found that 13.6 per cent of the 213 funds that ranked in the top quartile in 2019 maintained this ranking in both 2020 and 2021.

“The Australian equity general and Australian equity A-REIT categories had the highest retention rate, at over 20 per cent, while those in the international equity general fund category had the lowest tendency to stay in the top quartile (3.0 per cent) over three consecutive years,” said Ms Luk and Mr Wang.

Furthermore, S&P Dow Jones Indices said that 42.5 per cent of the 228 funds that outperformed their benchmarks between December 2011 and December 2016 continued to outperform between December 2016 and December 2021 while 17.1 per cent were merged or liquidated.

High-performing funds struggle to beat benchmarks

Only 4 per cent of Australia’s top-performing active funds managed to beat their benchmarks over five consecutive years.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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