Canadian equity fund performance: Skill vs. luck

Discover how consistent performance in Canadian equity funds reveals skill or mere luck in 2023

Canadian equity fund performance: Skill vs. luck

The Canada Persistence Scorecard Year-End 2023, prepared by S&P Dow Jones Indices and Fundata Canada Inc., examines the consistency of Canadian equity funds' performance.  

This report aims to determine whether investment results stem from skill or luck, highlighting that genuine skill is likely to persist, while luck is random and fleeting. 

The Persistence Scorecard evaluates the consistency of fund performance relative to peers. It reveals that active management outperformance tends to be short-lived, with few funds consistently outranking their peers.  

Across all seven categories, no manager who placed in the top quartile for the 12-month period ending December 2019 remained in the top quartile for the next four years.   

In 2023, Canadian active managers faced significant challenges, with 85 percent of Canadian Equity funds underperforming the S&P/TSX Composite Index. Maintaining top-tier performance proved difficult.  

Not a single top-quartile Canadian Focused Equity, Canadian Small-/Mid-Cap Equity, International Equity, or US Equity fund retained its position in the top quartile for the subsequent two years, compared to an expected 6.25 percent based on random chance.   

Over a five-year period, no active funds that ranked in the top quartile at the end of December 2019 managed to maintain that position over the next four years.  

Only a minority of equity funds across categories remained in the top quartile for two consecutive five-year periods. Specifically, 14 percent of Canadian Equity funds stayed in the top quartile over two consecutive five-year periods, below the 25 percent expected from a random distribution.   

During two consecutive five-year periods, a weighted average of 13 percent of the top half of active equity funds across categories merged or liquidated. In contrast, 29 percent of the bottom half of all categories faced mergers or closures.  

Sustaining alpha also proved elusive, with only 4.4 percent of active equity funds that outperformed their benchmarks in 2021 continuing their outperformance over the next two years.   

The phrase “past performance is no guarantee of future results” frequently appears in mutual fund literature. Despite this, many investors and advisors consider past performance and related metrics important in fund selection.  

The annual S&P Persistence Scorecard addresses whether past performance matters by tracking the degree to which historical relative performance predicts future performance.  

The scorecard covers performance persistence over three and five consecutive 12-month periods and two non-overlapping three- and five-year periods. 

Key features of the S&P Persistence Scorecard include rankings without survivorship bias, a clean universe excluding index and sector funds, and transition matrices showing movements between quartiles and halves over specified periods.  

The scorecard also tracks the percentage of funds that merge or liquidate and monitors movements across capitalization levels. Tracking reports highlight the percentage of funds that remain in the top quartile or half over consecutive periods.