Top-performing active fund managers in Europe struggle to replicate their success in subsequent years, according to research from S&P Dow Jones Indices.

The Persistence Scorecard adds further support to the notion that passive funds pack a better punch than their active counterparts.

The indexing giant’s Persistence Scorecard tests the well-known disclaimer that “past performance is not indicative of future results” by examining the consistency of alpha delivered by top-performing fund managers.

The failure to follow up on initial strong returns suggests that managers who initially outperform their peers and their benchmarks are likely to have done so because of luck rather than skill.

Consequently, an investor will typically have better success in selecting a fund at random rather than from a group of top performers.

The Persistence Scorecard adds a new dimension to S&P DJI’s assessment of active managers, complementing the SPIVA Scorecard which analyses the performance of actively managed funds against their relevant S&P benchmark indices over various time periods. The SPIVA Scorecard has, historically, shown that the majority of active fund managers in Europe fail to outperform their benchmark indices, especially over longer time periods.

Collectively, the findings of both the SPIVA and Persistence Scorecards add significant support to the argument that passive funds, such as index-tracking ETFs, pack a better punch than their actively managed counterparts.

Persistence Scorecard highlights

Amongst managers of Pan-European equity strategies over the two-year period since the onset of the Covid-19 pandemic, the Persistence Scorecard notes that just over half (52%) of the funds in the top quartile at the start of 2020 were able to remain in the same category by the end of the year. By the end of 2021, that number had fallen to just 21%.

More broadly, managers that had beaten their benchmark in any rolling three-year window had a 44.4% probability of outperforming in the subsequent year. The probability of the same fund outperforming for three consecutive years dropped sharply to just 7.2%.

For poorly performing managers – funds ranked in the bottom quartile by performance – the outlook was particularly dismal. Nearly two-thirds (62%) either remained in the lowest quartile or ceased to exist five years later. Fewer than 10% were able to turn their fortunes around and become top-quartile funds.

Managers of US equity strategies fared somewhat better, however, showing the strongest signs of persistence in the short term. After four years, a third (32.6%) of funds initially ranked in the top half by performance remained there, over 20% higher than would have been expected from a random draw. Consistency dropped off sharply thereafter with just 1.4% of the top quartile managing to retain their position in any rolling five-year period.

Approximately one-fifth (19.5%) of US equity managers who outperformed their benchmarks were able to replicate that success over the following three years, also higher than other categories.