Canadian funds prove that active management outperformance doesn't endure

S&P's SPIVA Scorecard reveals how funds that started out outperforming could not maintain that over longer periods

Canadian funds prove that active management outperformance doesn't endure

An analysis of Canadian funds shows that outperformance attributed to active management may not continue over the long term.

Despite fund literature stating that “past performance is no guarantee of future results” or similar, investors and advisors often rely on fund’s historical performance when making investment decisions.

S&P’s latest SPIVA Persistence Scorecard found that few funds consistently outrank their peers over time, and in the case of Canadian equity funds that were in the top quartile for performance over the 12-month period ending December 31, 2018, none maintained that position for the next four years through to the end of 2022.

Last year saw Canadian Equity funds faring better than usual, with only 52% underperforming over the one-year period even as the first half of the year saw Canadian equity indices suffer sharp losses followed by a bumpy second half and the year ending slightly negative.

However, the research suggests overperforming funds are unlikely to continue that over a five-year period and that their outperformance is probably going to diminish in a shorter period too.

For example, the report states that: “among actively managed domestic equity funds with top-quartile performance over the 12-month period ending December 2020, 5.9% of Canada Equity funds and 6.7% of Canada Dividend & Income Equity funds maintained top-quartile performance over the subsequent two 12-month intervals. In every other category, no funds maintained top-quartile performance over three 12-month periods.”

Fund closure risk

The analysis also determined that underperforming funds are at increased risk of closure.

Among actively managed funds in four domestic equity categories, more than 35% of those that were in the bottom half of performance in the five-year period ending in December 2017, were subsequently merged, or liquidated over the next five years.

However, for those funds in the top half across those same four categories and the same period, less than 18% were liquidated or merged in the subsequent five-year period.

This was not the case for fund style changes though, with the highest rate (21%) occurring within the top-quartile Canadian Dividend & Income Equity funds while the average rate of style changes across all categories for top-quartile funds was 8%, while for bottom-quartile funds it was just 5%.