A research paper from Gerstein Fisher echoes recurring findings from SPIVA® — there is very little persistence of performance in mutual funds, even highly-ranked ones:

Gerstein Fisher - Persistence of Top Quartile Fund Performance (or Lack Thereof)

Unlike the Performance Scorecard that uses consecutive one-year returns, the study focused on rolling three-year trailing returns in each fund category. This multi-year approach had a smoothing effect, so percentages of the top quartile persistence were higher than those found by SPIVA®. However, it is clear that after a few years, a very small percentage of funds remained in the top quartile.

Gerstein Fisher - Best to Worst and Worst to Best

As depicted above, the study also found that

…in the rolling 3-year periods between 2002 and 2012, the likelihood that a top performer would descend to the bottom quartile of returns turns out to be exactly the same (27%) [47% in the chart?], on average, as the chance that a “dog” of a fund ends up ascending to the top quartile in the following three years.

In short, statistically speaking, an investor would have been just as well off picking a professional manager with an abysmal record of returns as he would have been with a star manager.

So, what is an investor to do? Alpholio™ provides one possible recommendation: investigate a smoothed cumulative RealAlpha™ curve to determine whether the fund will continue to add value on a truly risk-adjusted basis. To learn more, please visit the FAQ and take a look at the analyses of sample mutual funds in this blog.

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