The performance persistence myth: what new research tells us about the latest hot funds
- Robin Powell
- 31 minutes ago
- 11 min read
A comprehensive new study of nearly 9,000 funds reveals that performance persistence — the ability of top-performing funds to stay on top — is largely a mirage. By year two, most "winners" had fallen from grace. By 2024, every single top fund in 11 of 20 categories had dropped out of first place. With 80% of advisers now allocating to active funds, understanding why performance persistence fails has never been more critical for investors.
Your financial adviser slides a glossy fact sheet across the desk. The fund's three-year returns gleam: 47%. The manager's name appears in trade press "ones to watch" lists. Your adviser leans forward: "This is exactly the kind of opportunity we've been waiting for."
You feel the pull. The numbers don't lie. The credentials are impeccable. Every instinct says: get in before everyone else does.
This scene plays out in advisory meetings across the country every week. The fund industry has built a £9 trillion apparatus around a simple premise: past performance predicts future success.
Platforms rank funds by recent returns. League tables celebrate "top performers." Marketing materials trumpet track records. The entire system nudges you toward one conclusion: yesterday's winners will be tomorrow's champions.
But what if that premise is wrong? What if chasing performance persistence — the ability of funds to maintain top-quartile positions — is not sophisticated investment strategy but a wealth-destroying trap dressed in respectable clothing?
A landmark 2025 study from Morningstar, analysing nearly 9,000 funds representing $24 trillion in assets, provides the most comprehensive recent answer. And it's not the answer the fund industry wants you to hear.
The evidence: total attrition
The Morningstar Fund Persistence Study 2025 tracked funds across 20 investment categories from 2021 through 2024. The research period included extreme market conditions: the COVID recovery boom, inflation shock, aggressive interest rate rises, and 2022's bond market collapse. If managerial skill were going to reveal itself, these volatile years should have been the perfect laboratory.
Here's what the study found: in 11 of the 20 categories examined, every single top-quartile fund from 2021 had fallen out of first place by 2024. Not most. Not the majority. All of them.
If you'd picked the very best-performing funds at the start of 2021 — the cream of the crop, the award winners, the manager darlings — your chance of still holding a top-quartile fund by 2024 was zero in more than half the categories studied.
Even in categories that didn't see total attrition, performance persistence was vanishingly rare. In intermediate core bond, just 6 out of 35 top-quartile funds (17%) maintained their position after three years. In foreign large blend, only 4 of 49 funds (8%) stayed on top. Small blend and small value managed three funds each — single digits against dozens of initial top performers.
These weren't obscure, illiquid corners of the market. These are mainstream categories holding hundreds of billions in investor assets.
Chart 1. Transition matrix for one-year persistence of active funds
The study also conducted a transition analysis examining whether funds stayed in the same performance quartile year-to-year from 2010 to 2024. If outcomes were purely random — equivalent to rolling dice — you'd expect roughly 25% of funds to remain in their quartile.
The observed probability? Approximately 25%.
Performance persistence was indistinguishable from chance. For actively managed funds, roughly one in four top performers maintained that status the following year — the same odds you'd get from a coin flip.
This comes at a particularly dangerous moment. Recent industry surveys show that 80% of financial advisers now allocate to active funds — a significant increase driven by the active ETF boom. The temptation has never been stronger. The evidence has never been clearer.
But the raw numbers only tell part of the story. To understand why performance persistence fails, we need to examine three structural forces that doom it.
The calm-weather fallacy
The Morningstar study uncovered a striking pattern: performance persistence increased during periods of low market volatility. Between 2016 and 2019, when the VIX index (which measures market fear and uncertainty) remained subdued, roughly 30–40% of top-quartile funds maintained their ranking year-over-year.
That figure might seem encouraging — nearly double the random baseline. But here's the brutal irony: calm markets are precisely when you don't need active management.
Chart 2. One year persistence and volatility
During 2020, when the VIX spiked amid pandemic chaos, persistence fell to around 15% — worse than random chance. The funds that had looked skilful in calm waters capsized when the seas turned rough.
This isn't a one-off anomaly. Morningstar's Active/Passive Barometer covering the turbulent first half of 2025 showed active equity managers achieved just a 29% one-year success rate. Over ten years, only 13.5% succeeded.
Why does skill — if it exists — disappear precisely when investors need it most?
During calm periods, market movements are smoother and more predictable. Strategies relying on momentum, mean reversion, or sector trends can appear to "work" simply because the environment is forgiving. A rising tide lifts most boats. Mediocre managers can look competent.
But when volatility spikes — when fear grips markets, correlations shift, and price movements become erratic — those same strategies fracture. The fund manager who looked shrewd navigating gentle swells proves helpless in a storm.
This matters because investors typically make allocation decisions during calm periods, based on recent performance in calm periods. They're effectively buying calm-weather sailing expertise and expecting it to function in hurricanes.
If managerial skill were genuine and repeatable, it should shine most brightly during turbulence. That's when superior stock selection, risk management, and tactical positioning should justify the fees.
Instead, the opposite happens: randomness increases, and persistence evaporates. The very conditions that justify paying for active management reveal it doesn't work.
Chart 3. The decline of one-year persistence
The fee doom loop
The Morningstar study quantified something that previous research hinted at but hadn't measured so precisely: fees create profoundly asymmetric outcomes.
Low-cost funds that achieved top-quartile performance were roughly 6% more likely to maintain that position over the following year compared to their expensive peers.
Meanwhile, high-fee funds that landed in the bottom quartile were approximately 13% more likely to remain laggards — or be liquidated entirely.
Notice the asymmetry: being cheap gives you a modest edge if you're winning. Being expensive doubles your risk of failure if you're losing.
This asymmetry isn't a statistical quirk — it's structural. Performance is volatile and unpredictable. Fees are locked in and guaranteed.
A fund charging 0.75% that outperforms by 2% in year one might underperform by 1% in year two. But that 0.75% gets extracted every single year, in every market environment, regardless of results. Over three years, the fee drag compounds. Over five years, it becomes determinative.
This is why research by Russel Kinnel and Jeffrey Ptak at Morningstar showed that expense ratios outperformed every other predictor of future fund performance. Ptak's 20-year analysis found that the cheapest funds outperformed the priciest in every single year spanning the study.
The pattern followed what Ptak called "an almost perfect stair-step" — from low cost to high cost, performance deteriorated in predictable lockstep.
Chart 4. Transition matrix for five-year persistence of active funds
The study revealed another brutal reality: poor-performing funds don't just underperform — they often disappear. Funds in the bottom quartile were more than twice as likely to be closed or merged within five years.
This "survivorship bias" means the fund universe you see today has been scrubbed clean of the worst performers. League tables showing "average" active fund returns systematically overstate reality because the failures have been erased from the record.
When fund companies close underperforming funds, investors are typically forced to reallocate — often buying into the next "hot" fund just in time to experience its mean reversion. The cycle repeats.
Here's the uncomfortable arithmetic: over decades of investing, fee differences that seem trivial in any single year compound into portfolio-destroying drags. The gap between paying 0.15% for an index fund and 0.75% for an active fund might not feel meaningful when you're looking at quarterly statements. But compound that difference over 25 years, and you've surrendered a significant portion of your wealth — not to superior returns, but to the financial services industry.
So persistence fails in volatility, and fees guarantee underperformance. But what about the exceptions — the categories that did show some persistence?
The exception categories — and why they don't rescue the case
Four categories in the Morningstar study showed modest performance persistence over the three-year period:
Intermediate core bond: 6 of 35 funds (17%)
Foreign large blend: 4 of 49 funds (8%)
Small blend: 3 funds
Small value: 3 funds
At first glance, these might seem like evidence that skilled managers can persist in certain niches. Perhaps bonds and small-cap value stocks offer informational inefficiencies that smart managers can exploit?
Three problems destroy this reasoning.
First: The persistence is marginal. Even in the "best" category (intermediate core bond), fewer than one in five top funds stayed there. An 83% failure rate isn't a vindication of skill — it's confirmation that picking winners remains nearly impossible.
Second: You can't know in advance. The study analysed data after the fact. In 2021, investors had no way of identifying which of the 35 intermediate core bond funds would be the lucky six survivors. The "exception" only exists in hindsight.
Third: Fees still dominated. Even within these categories, low-cost funds showed better persistence than expensive ones. The study's broader finding held true even in the supposedly skill-friendly niches.
This aligns with decades of research. Eugene Fama and Kenneth French found that only a small fraction of managers achieved returns not attributable to luck — and that fraction was fewer than would be expected by chance alone.
Studies on identifying skilled managers in advance consistently reach the same conclusion: it can take decades, if not centuries, to distinguish genuine ability from a lucky streak. Even 14 years of outperformance proves nothing — as Terry Smith's Fundsmith Equity demonstrated when four subsequent years of underperformance erased the case for skill.
Yes, somewhere in the fund universe, a handful of managers may possess genuine, repeatable skill. But you cannot identify them in advance. And even if you could, their capacity constraints, fee structures, and inevitable mean reversion would likely erode any advantage before you captured it.
Investing based on exceptions is like buying lottery tickets because someone wins every week. True — but it won't be you.
Certainty versus randomness
The term "passive investing" may be the worst marketing in financial history. It sounds lazy. Resigned. Defeatist.
But here's what passive investing actually delivers: guaranteed market returns, minus minimal costs.
That guarantee beats approximately 80% of active managers after fees over meaningful time horizons. It's not "settling for average" — it's claiming the prize that most professionals fail to capture.
Active funds offer the possibility of outperformance coupled with the probability of underperformance. The Morningstar study showed that probability playing out in real time: randomness masquerading as skill, with fees tilting the odds further against you.
Passive funds offer a different proposition: own the entire market, capture all the winners, pay almost nothing in fees, and accept that your returns will be precisely what the market delivers.
That's not a consolation prize — it's the most reliable path to wealth accumulation that exists.
Index funds possess three permanent advantages.
First: No skill required. You're not betting on a manager's ability to predict the future. You're owning a slice of every company, guaranteeing that you'll hold tomorrow's winners — whoever they turn out to be.
Second: Minimal costs. While active funds charge 0.75% to 1.25% annually, index funds cost 0.05% to 0.20%. That gap compounds relentlessly in your favour.
Third: No surprises. Style drift, manager turnover, strategy changes, liquidations — none of these risks exist with index funds. What you buy is what you hold.
S&P's SPIVA scorecards, updated semi-annually, consistently show that over 15-year periods, more than 82% of active managers across equity categories fail to beat their benchmarks. In some categories, not a single fund succeeded.
Morningstar's own Active/Passive Barometer reinforces this: the longer the time horizon, the worse active managers perform. The maths is unforgiving: fees compound against you, and luck eventually reverts to the mean.
There's one more advantage rarely discussed: passive investing protects you from yourself.
Performance-chasing is a behavioural bias, not an intellectual failing. Our brains are wired to see patterns in randomness, to extrapolate trends, to feel the pain of missing out. Index funds remove the temptation entirely. There's no league table to obsess over, no manager to second-guess, no decision to make beyond "stay invested."
What to do now
If you're currently holding "hot" funds:
Start with an audit. List every active fund in your portfolio. Note their expense ratios and their performance quartile over the past one, three, and five years. Ask yourself honestly: did you pick them before they surged, or because they surged?
Calculate your all-in costs. Don't just look at the fund's ongoing charge. Add platform fees, transaction costs, and any adviser charges tied to fund selection. The total is probably higher than you think.
Compare to a passive alternative. For each active fund, identify a comparable low-cost index fund. Calculate the fee difference. Multiply by your holding size. That's the annual "performance persistence premium" you're paying — and the evidence suggests you won't receive it.
If you're selecting new funds:
Ignore recent performance. Full stop. If a fund has outperformed over one to three years, that tells you nothing about what happens next — except that you're likely buying near a performance peak.
Prioritise fees. If you're determined to use active funds, choose the cheapest options within your preferred category. The 6% persistence advantage for low-cost winners is marginal, but it's the only edge you can reliably identify in advance.
Demand manager tenure and stability. If the manager who generated the track record has left, you're buying a brand name, not a strategy. Performance doesn't travel with the company logo.
If your adviser pushes performance:
Challenge them directly: "I've read that performance persistence is essentially random over short periods. Can you explain why this fund will be different?"
Ask about fees: "What's the all-in cost of this recommendation, including your commission or trail fees? What passive alternative exists, and why shouldn't I use that instead?"
Request evidence: "Can you show me data — not marketing materials — proving this manager's skill is repeatable over ten-plus years?"
Most advisers won't have satisfactory answers. That's not because they're dishonest — it's because satisfactory answers don't exist.
Breaking the cycle
The fund industry generates billions in revenue by convincing investors that this time, this manager, this fund will be different. League tables and marketing materials all reinforce the same message: past performance matters.
The Morningstar study provides the most comprehensive recent evidence that the message is false. Performance persistence over short horizons is a mirage. Chasing it destroys wealth.
You now face a choice:
Continue chasing performance, hoping you'll be luckier or smarter than the 80% of investors who underperform, or accept that market returns — captured cheaply, held patiently, and compounded over decades — beat nearly every alternative.
The data is clear. The choice is yours.
Evidence-based investing isn't exciting. It doesn't produce cocktail party stories about the brilliant manager you discovered. It won't make you feel clever.
What it will do is preserve your capital during downturns, capture market gains during rallies, minimise the wealth transfer to financial intermediaries, and give you the highest probability of achieving your long-term financial goals.
Performance persistence is a myth. Market returns are not.
The question isn't whether you can find tomorrow's winners. The evidence shows you almost certainly can't.
The question is whether you're willing to stop trying — and claim the prize that's waiting for everyone disciplined enough to take it.
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