As another investment year draws to an end, it’s the approach of the investment industry’s annual ‘Oscar season’. While asset managers uniformly downplay short-term investment performance in favour of three-, five- and ten-year cycles, there’s no doubt they’re as keen to tread the red carpet. At stake is bragging rights for the best-performing investment group; best-performing manager and best-performing fund.

Investors equally crave the acknowledgement that last year they chose the best, and if they didn’t, will question whether they should now switch for next year. But can any fund or fund manager consistently perform at the top level, given that according to the S&P Persistence Scorecard, demonstrating the ability to outperform peers repeatedly is the only proven way to differentiate a manager’s luck from skill, and relatively few funds consistently stay at the top?

Skill versus luck

S&P’s analysis of the performance of different funds, over different periods, reflects the extreme difficulty they have in remaining a top-performing fund, as investment styles go in and out of favour with the evolving investment cycle. Out of 703 top-quartile domestic equity funds as at September 2011, only 0,28% remained in the top quartile by end September 2015.

‘An inverse relationship generally exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that no large-cap or mid-cap funds managed to remain in the top quartile at the end of the five-year measurement period. This figure paints a negative picture regarding the lack of long-term persistence in mutual fund returns.’ So choosing the best is not just about who’s on the red carpet this year.

Most active managers can’t beat the market

The S&P SPIVA® US Scorecard (the referee in the active versus passive debate) reports that the US equity market ended 2015 on a rather flat note amid plunging oil prices, a strengthening US dollar, and the devaluation of the Chinese renminbi, all of which contributed to market volatility. The S&P Composite 1500® returned 1,01% while the S&P 500® posted 1,38% on a total return basis.

Their findings included:

  • During the same one-year period, 66,11% of large-cap managers, 56,81% of mid-cap managers, and 72,2% of small-cap managers underperformed the S&P 500, the S&P MidCap 400®, and the S&P SmallCap 600®, respectively.
  • Over the five-year period, 84,15% of large-cap managers, 76,69% of mid-cap managers, and 90,13% of small-cap managers lagged their respective benchmarks.
  • Not only is it tough to choose the best active managers, but even when we get that right there’s the risk they may not survive. Over the past five-year period, nearly 23% of domestic equity funds, 22% of global/international equity funds, and 17% of fixed income funds had been merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis.


  • It bears repeating: past performance is not a good predictor of future performance.
  • It’s not about timing the market, it’s about time in the market, and that applies equally to your chosen investment house.
  • Beware of the fees, but remember value is multi-dimensional.
  • If it sounds too good to be true, stay away.
  • Research your investment house, managers, investment philosophy, systems and processes.
  • If you don’t have time to do thorough due diligence, find an expert who can.
  • Learn to control those behaviours that destroy wealth or find a good coach to help with these.

Author: Mike Lledo CA(SA) is New Business Initiative at Citadel Wealth Management