How Many Funds Outperformed in 2016, 2017, 2018, and 2019? Less Than 13%.

Persistence is largely a myth, study shows.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Mutual fund managers struggle to stay ahead of their benchmark for very long, according to research from an S&P Global unit.

A small portion of U.S. stock funds that beat the S&P Composite 1500 in the three-year trailing period ending in 2016 continued to outperform through the end of last year, S&P Dow Jones Indices said in its most recent semiannual report on “fleeting alpha,” analyzing whether mutual funds from one three-year period continued to outperform thereafter. Just 12.9 percent of the 155 domestic equity funds that exceeded their benchmark in 2016 maintained their winning streak in each of the following three years.

“If I were a betting man, I would have higher chances of getting three consecutive heads on a flip of a coin,” Gaurav Sinha, the Americas head of research and design at S&P Dow Jones Indices, said Thursday in a phone interview. “My chances of success would be higher compared to the chances of me picking a fund that persists its performance for three consecutive years over its benchmark.”

Actively managed funds are more expensive than passive investment funds that merely track indexes — despite being unlikely to outperform over time. For its scorecard, S&P said it measured three-year annualized returns produced by funds on a net-of-fees basis.

The vast majority of domestic equity funds showed little persistence in outperformance — except for some small- and mid-cap managers, S&P said in the research report. “International equity funds, in general, did slightly better.”

Eight of the 18 domestic equity categories tracked by S&P had no funds that continued to outperform in each of three years following 2016. Funds that buy large-cap value stocks were among those particularly bad at persistently producing alpha, with none still beating their benchmark at the end of last year.

U.S. growth funds focused on mid-cap and small-cap stocks were bright spots in the scorecard, standing out for their alpha persistence.

Sixty-seven percent of mid-cap growth funds that had beaten their benchmarks in 2016 continued to outperform in 2019, the report shows, while half of the small-cap growth funds remained winners. Sinha cautioned, though, that a such small number of managers in each of those categories initially outperformed that it took relatively few examples of persistence to get to a high percentage of their success in 2019.

[II Deep Dive: Funds Saw Largest Ever Exodus in March, Morningstar Says]

As for international equity funds, thirty-one percent of small-cap managers kept their winning status for three years. That was the best-performing category among global funds, according to the report, which also revealed where managers struggled most.

“Emerging market funds did notably poorly, with no funds managing to repeat positive alpha after only the first two years,” S&P said.