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|  | JULY 19, 2005
 FUND INVESTOR Funds That Keep the Hits ComingS&P's first-ever fund-consistency scorecard shows only a small minority of top-performing funds maintain excellent returns over timeEvery mutual fund informs us that "past performance is not always indicative of future performance," writes Standard & Poor's, which launched the first scorecard that measures the consistency of top mutual-fund performers over three and five consecutive years. The semiannual scorecard also measures the persistence of fund performance for the one-, three-, and five-year nonoverlapping periods. As of May 31, only 10.7% of large-cap funds, 9.2% of mid-cap funds, and 11.5% of small-cap funds maintained a top-quartile ranking over three consecutive years. The scorecard also show that 28.9% of large-cap, 26.4% of mid-cap, and 27.9% of small-cap funds maintained a top-half ranking over the same time period. In addition, the scorecard tracks cumulative performance over two nonoverlapping three-year periods. The average top-quartile repeat performance was 27.7%, and the average top-half repeat performance was 47.9%. "VERY DIFFICULT." Not surprisingly, Standard & Poor's (which, like BusinessWeek, is a unit of The McGraw-Hill Companies) determined that fourth-quartile funds had a higher probability of disappearing. Over the three-year time horizon, 33.5% of large-cap, 32.3% of mid-cap, and 26.9% of small-cap fourth-quartile funds disappeared due to mergers or liquidations. A large percentage of the fourth-quartile funds that survived still remained in the bottom half. "Our research suggests that maintaining a top-quartile position over longer horizons is very difficult," says Srikant Dash, index strategist at S&P. "Only 3% of small-cap funds maintained a top-quartile ranking over two nonoverlapping five-year periods, while there were no such funds in the large- and mid-cap category. Repeat top-half performers totaled 18.2%, 12.9%, and 17.2% for large-cap, mid-cap and small-cap funds, respectively." "Whether we viewed consecutive 12-month performance or nonoverlapping cumulative periods, the characteristics of top-half winners were similar," says Rosanne Pane, mutual fund strategist at S&P. "Management experience counts, expenses matter, and protecting the downside helps." MORE VALUE WINNERS. Pane says consistent top-half performers had longer manager tenures and lower expenses relative to their peers. "In addition, consistent winners also minimized or avoided losses during the bear market relative to their peers," she says. Over the past five years, the majority of top-half performers were value funds. Hotchkis & Wiley funds led the top 10 lists for large-cap, mid-cap, and small-cap funds. Finding top-performing small-cap funds that are still open to investors is difficult. Six of the top 10 small-cap funds are closed, says S&P. S&P believes that determining excellence in mutual funds depends on more than last quarter's or last year's track record. Investors should focus on the consistency of long-term fund performance in both bull and bear markets, consider the expertise and experience of the fund-management team, and always review the level of the fund's expense ratio relative to peers. Here are the top 10 funds within each equity-fund category, ranked by five-year total annualized returns, that showed performance persistence over five consecutive 12-month periods.
 From Standard & Poor's Edited by Karyn McCormack 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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