Active Funds Are Inconsistent

Active Funds Are Inconsistent

over 3 years ago2 mins

It’s often said that past performance is no guarantee of future results – but fresh analysis of “actively managed” US investment funds underscores just how true that is 🙈

What does this mean?

Everybody wants their investments to provide consistently strong returns – and you might think that top track records could give some indication as to which will do well going forward. That’s especially true of actively managed investment funds with professionally picked portfolios; after all, last year’s most powerful performers must know what they’re doing, right?

Not according to index and ratings provider S&P Global. Its latest Persistence Scorecard, released this week, crunches the numbers on consistency – and finds that, when it comes to US-focused active funds, precious few outperform their competitors for long.

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Short-term performance is no good guide either: less than 4% of US stock funds with better-than-average performance in 2015 pulled off that feat in each the following four years, and just 0.2% of those in the top quartile. Bond funds appeared somewhat more steady – but then again, there are significantly fewer of them 😒

Why should I care?

One of the only clear patterns emerging from S&P’s study was that the poorest performers closed: nearly 40% of 2010-2014’s bottom-quartile stock funds had disappeared by 2019. Active management may sound exciting – but while the performance of such funds compared to “passive” ones tracking investment indexes improved last year, the majority still failed to beat their equivalent exchange-traded fund (ETF). Much of that comes down to higher fees.

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The precipitous plunge of former star stock picker Neil Woodford last year was another reminder why half of all US stock market investment is now passive. Even the most powerful past performance is ultimately no guarantee things will continue – as many top hedge funds and their investors have found during the pandemic.

Still, it works both ways. Markets may have been on the up in recent months, taking passive investors along for the ride – but in uncertain times, some come back around to the responsiveness of active strategies. Whether that happens in the next downturn remains to be seen… 🧐



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