Standard & Poor’s: Does Past Performance Really Matter?

Frank Luo is the head of Global Research and Design at Standard & Poor’s.

The S&P Persistence Scorecard tracks the consistency of top performers over yearly consecutive periods and measures performance persistence. This scorecard highlights performance persistence over three- and five-year consecutive 12-month periods and two non-overlapping three- and five-year periods. The University of Chicago’s Center for Research in Security Prices Survivorship (CRSP) Bias Free Mutual Fund Database serves as the underlying data source.

How many funds managed to repeat top performances consistently?

Frank Luo: The short answer is very few. The S&P Persistence Scorecard report has the full statistics. I will highlight two to show how hard it is to be a consistent top performer.

Out of 716 funds which were the top quartile performer in March 2010, only 29 funds stay at the top quartile every year for the next three years.

Out of 535 funds which were the top quartile performer in March 2008, only 5 funds stay at the top quartile every year for the next five years.

In their persistence calculations, analysts often limit their sample to funds that continue to exist over the complete time period examined. Why did your report account for all initially available funds?  

By including all initially available funds our report avoids the survivorship bias. For anyone making an investment decision, all funds available at the time of that decision are part of the initial opportunity set. If we limit our sample to the funds that exist over the complete time period examined, the merged or liquidated funds would be discarded, which leads to a survivorship bias in the measurement of persistence.

Did you take account of the influence of fund fees in your report?

Mutual fund returns are net of fees.

You analyzed managed domestic U.S. equity funds. Do you know similar results for non-US equity funds markets or funds covering non-equity asset classes?

We only publish the Persistence Scorecard for US equity funds. However, in a sister report, the S&P Index Versus Active Funds (SPIVA) scorecard, where mutual fund returns are compared with index returns at one snapshot, we do extend the analysis to international equities and non-equity assets such as bonds.

Do you support the general statement that past performance is not an indicator of future outcomes?

Our persistence reports provide convincing empirical evidences to support the above statement.

Are successful investors like Warren Buffett successful by accident?

I don’t think it is by accident. Mr. Buffett is successful because he is exceptionally good at what he does. Our reports show that investing is a very challenging endeavor and very few investors can consistently do well.  However, there is no denial of the existence of investment genius. Mr. Buffett said it the best himself that he «is genetically programmed to allocate capital». The trouble with ordinary investors is that they all think they are Mr. Buffett.

What was the most surprising result of your report?

How low the odds are for a top performing fund to stay on top consistently on an annual basis. It is unrealistic to expect a fund to win the short-term (one year) performance derby, year after year.

June 15, 2012

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