Bulls Hurdle Jobs Data Too
As the Chicago Bears and the Indianapolis Colts line up on Sunday, think twice before betting on either returning next year. Teams in the previous five Super Bowls have gone a middling 81-79 combined the season after ranking as the elite among their peers.
The latest mutual fund performance persistence scorecard from Standard & Poor’s suggests that repeated success was equally difficult for U.S. stock mutual funds over the same period.
S&P’s scorecard is designed to address a common drawback of fund rankings: they tend to smooth over bad years. Because investors typically focus on annualized returns over a three- or five-year period, funds that have a single stellar year can look attractive for the next few years, even if their performance falls off sharply.
The persistence scorecard displays a fund’s movement between quartiles and halves for five nonoverlapping time periods. It looks only at actively managed, diversified U.S. stock funds (not index funds or sector funds), and these funds are compared only against peers that invest in stocks of the same size — small-cap, mid-cap or large-cap. The scorecard also evaluates other dynamics such as expenses and manager tenure.
Just 71, or 13.2%, of the large-cap stock funds analyzed in the latest report earned a top-half ranking for five straight 12-month periods ending Dec. 31, 2006. For mid-cap stock funds, the figure was 16, or 9.9%, and for small-cap stock funds it was 24, or 10%.
Marisco 21st Century (MXXIX) headed the list of large-cap funds, returning an annualized 15.83%. Of the mid-caps, Fidelity Leveraged Co Stock (FLVCX) stood nearly 10 percentage points higher than its closest peer with a 27.08% five-year annualized return, while Perritt Capital Growth (PRCGX) achieved a return of 20.15% over the period, the best by a small-cap fund.
Staying in the top quartile proved even more difficult, as only eight large-cap stock funds, or 3% of the total, made the cut. Only two mid-cap stock funds, or 2.5%, and zero small-cap stock funds retained this distinction.
“Very few funds repeat a top-quartile performance,” S&P index strategist Srikant Dash said in a press release. ” [Our] research shows that a healthy percentage, and in most cases a majority, of top-quartile funds in the future will most likely come from the ranks of prior period second and third quartiles.”
Over the long run, returns were slightly more predictable, as 17.3% of large-cap funds in the top quartile during a five-year period ending Dec. 31, 2001, landed in the top quartile over the five years ending Dec. 31, 2006. Only 10.4% of mid-cap funds and 17.7% of small-cap funds landed in the top quartile for the same two five-yyear periods.
The consistency scorecard addresses another drawback to fund rankings: survivorship bias. Fund companies typically liquidate their bottom-ranking offerings to make their overall slate appear stronger.
That means the returns for a class of funds can be overstated if only the survivors are ranked. But S&P’s consistency scorecard ranks all of the funds that were in operation during a given period, although the ones that have been either merged or liquidated are clearly identified.
The latest report indicates that funds ranked in the fourth quartile are most at risk. Over the past five years, 43% have disappeared.