PERSISTENCY OF TOP QUARTILE PERFORMANCE
One of the statements that the Magwitch Offshore distribution team generally make in presentations is that the index is almost guaranteed to be ranked within the first quartile of investment returns when measured over any meaningful investment period.
With years of passive management under our collective belts we are reminded constantly how this statement is generally true. Every month end we release our ETF report where we rank “well-known” active managers performance against the appropriate Morningstar category benchmark. The Morningstar category benchmark is important for Magwitch Offshore as our investment process is to create portfolios that track the benchmark with the lowest tracking error at the lowest fee.
Whilst the benchmark continually falls in the first quartile, the relative positions of the active managers change all the time.
Back in November 2021 this was the relative performance within the USD Growth category. Funds are ordered based on their annualized 5-year performance figures.
The Morningstar category benchmark was in the top quartile together with funds from Stanlib, Momentum and Nedgroup. Due to their performance over the period ended November 2021 these funds may have been under serious consideration by investors and advisors alike when constructing portfolios.
Flip 18 months forward and our May 2023 ETF Report included the same table for the USD Growth category with the funds ranked as per their new 5 year numbers.
What is telling is those funds highlighted in the light red colour that were previously all first quartile funds are now sitting between second and third quartile in performance rankings. New funds have joined the one constant – with a different Nedgroup fund and a Marriott fund joining the ever-present benchmark.
This is consistent with data released by S&P Dow Jones Indices in their SPIVA scorecard. As part of the SPIVA (S&P Index versus Active) scorecard they conduct research into the persistency of performance by active managers.
In their analysis they found that within the US Large-Cap Funds, only 37% of top half funds repeated that performance over the next period. The persistency of top half performance fell away even more notably when looking at Mid-Caps and Small-Caps.
The most telling statistic included in the SPIVA Persistency scorecard was that “Of 2020’s top quartile large-cap funds, none continued in the top quartile for the next two years.”
We know that investment styles are often cyclical with certain economic conditions favouring value whilst at other times conditions favour growth. We see this play out as the relative positions of the various funds ebb and flow as some months their rankings improve, overtaking their peers. And at other times their relative rankings decline as their peers outperform them. This makes active manager selection a very difficult task for advisors. The funds that have performed well recently may not necessarily carry that performance into future periods.
From our side we take comfort in the very statement that we continue to make. That by tracking the benchmark one should achieve first quartile performance over any meaningful investment period.
Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.