What’s Past Is Past: Superior Performance Last Year Doesn’t Guarantee It This Year

Does past performance matter? “The Persistence Scorecard” published by Standard & Poor’s helps answer the question of whether active management consistently provides superior, predictable returns over a passively managed fund. It is an important research effort in the active vs. passive management debate.

Jumping ahead to the conclusion, actively managed mutual funds do not have persistent performance. Just because one fund had superior performance last year does not mean it will have superior performance next year. In fact, an actively managed mutual fund has a very low chance of providing superior performance year after year.

The results are astounding. These are statistics you can use to impress your friends. Of the 1,144 U.S. stock funds in the top 50% best performers for one year ending March 2014, the following percentage were still in the top 50% as of:

March 2015   55%
March 2016   28%
March 2017   10%
March 2018    8%      

Of the 571 U.S. stock funds in the top 25% best performers for one year ending March 2014, the following percentage were still in the top 25% as of:

March 2015   30%
March 2016     8%
March 2017    0.2%
March 2018    0.2%  

Why does this matter? Other than being a fascinating subject for our “Fun Facts” newletter, the conclusion of this research is one of the main reasons we use passively managed or index funds for your portfolio: Passively managed funds provide a high degree of predictability in matching the performance of the asset class in which they are invested.

This does not mean that passively managed funds provide consistent, year-by-year absolute performance (the annual returns will vary just like the underlying stock market investments will). But if you own a U.S. large company index fund, you don’t have to worry about U.S. large company stocks being up 8% and your fund being up only 5%. Remember, our goal is to provide you with financial peace of mind, and using a passively managed fund gives you one less thing to worry about.

As always, please contact us with any questions, news, or comments.