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Standard & Poor's continues to find that very few funds manage to consistently repeat top-half or top-quartile performance. In its semiannual mutual fund persistence scorecard of U.S. equity funds, S&P measures the consistency of top mutual fund performers over three and five consecutive years. It also measures the persistence of fund performance for one-, three-, and five-year non-overlapping periods.
"Standard & Poor's research shows that very few funds manage to consistently repeat top-half or top-quartile performance," says Srikant Dash, Index Strategist at Standard & Poor's. "The low count of mutual funds that consistently maintain top-quartile rankings is a sobering reminder about the risks of chasing past performance."
Over the five years ending June 30, 2006, only 58 (or 10.8%) large-cap funds, 12 (7.9%) mid-cap funds, and 19 (7.7%) small-cap funds maintained a top-half ranking over five consecutive 12-month periods. A total of three large-cap funds (1.12%), zero mid-cap funds, and one small-cap fund (0.81%) maintained a top-quartile ranking over the same period.
EXPERIENCE COUNTS. Looking at longer time horizons, only 17.5% of large-cap funds with a top-quartile ranking over the five years ending June 30, 2001, maintained a top-quartile ranking over the next five years ending June 30, 2006. Only 6.8% of mid-cap funds and 18.7% of small-cap funds repeated their top-quartile performance over the same period. Similarly, 36.3% of large-cap funds, 26.4% of mid-cap funds, and 47.0% of small-cap funds with a top-half ranking over five years ending June 30, 2001, maintained a top-half ranking over the next five years ending June 30, 2006.
Funds with winning streaks have a couple of things in common. "Our research has found that consistent top-performing funds tend to share similar characteristics, in particular, more experienced management teams which can successfully maneuver their funds through volatile markets," says Rosanne Pane, mutual fund strategist at Standard & Poor's.
For example, the average tenure for a large-cap manager is 5.6 years, while the average tenure of a large-cap manager who has ranked in the top half for each of the past five 12-month periods is 9.5. The average tenure of a large-cap manager who retained a top-half performance over the past two five-year periods is 11.9 years.
Lower expenses are also a common thread. "Consistent, top performers also tend to have lower expense ratios, and minimize the expense drag on performance," Pane says. Funds with more diversified holdings also stood out.
Here are the top 10 consistent equity funds in each category, ranked by five-year annualized returns as of June 30, 2006, according to S&P.
For more details, Standard & Poor's Mutual Fund Performance Persistence Scorecard is available at www.standardandpoors.com. (To view last year's scorecard, see BusinessWeek.com, 7/19/05, "Funds That Keep the Hits Coming".)
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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