Fund performance persistence: what the latest evidence shows

Bottom line up front: If you're choosing funds based on past performance, you're likely wasting your time and money. Comprehensive research spanning decades reveals that consistent outperformance among active fund managers is so rare it might as well be random chance — and the few exceptions typically reflect luck rather than skill.

The investment industry loves to remind us that "past performance is no guarantee of future results," yet this disclaimer appears to fall on deaf ears. Investors and advisors routinely select funds based on track records, star ratings, and performance rankings. But does this strategy actually work?

The latest S&P Persistence Scorecard, combined with decades of academic research, provides a definitive answer: overwhelmingly, no.

The disappearing act of top performers

The most striking finding from the 2024 S&P data is just how quickly yesterday's winners become tomorrow's disappointments. Among funds that ranked in the top quartile (best 25%) across all domestic equity categories as of December 2020, exactly zero remained in the top quartile over the subsequent four years.

Let that sink in. Not a single fund that was considered a top performer at the end of 2020

managed to stay there through 2024.

Even when researchers lowered the bar from "top quartile" to simply "above average" (top half), the results remained dismal. Only 2.4% of large-cap funds that were above median in December 2020 stayed above median for the next four consecutive years. For context, if performance were entirely random, you'd expect about 6.25% to achieve this by pure chance.

This pattern isn't unique to recent years. James Davis's seminal 2001 study examining nearly 4,700 U.S. equity funds from 1962-1998 found that no investment style earned positive abnormal returns over the long term, with value funds actually underperforming by about 2.7% per year after adjusting for risk factors.

The myth of short-term skill

Perhaps managers just need time to prove themselves? The data suggests otherwise. Looking at more recent performance over three-year periods, the results are equally sobering:

• Zero top-quartile large-cap funds from 2022 maintained their ranking through 2024

• Only 9% of above-median large-cap funds from 2022 stayed above median for the next two years

• If outperformance were random, we'd expect about 25% to repeat

This pattern holds across fund categories. Small-cap funds fared slightly better but still disappointed, with only 6% of top-quartile performers from 2022 maintaining their status through 2024—down from 10% the previous year.

Andrew Clare's 2016 research examining long-serving fund managers found "little evidence of year-to-year persistence," noting that top-decile performers often turned negative the following year. Even over a 10-year horizon, the persistence was not statistically significant.

The alpha mirage

When funds do manage to beat their benchmarks, this "alpha" proves equally ephemeral. Across all equity categories, only 8.3% of funds that outperformed their benchmarks in 2022 managed to do so consistently over the subsequent two years. This figure has actually declined from 12.8% reported the previous year.

The message is clear: beating the market one year tells us virtually nothing about a manager's ability to do so again.

Academic research reinforces this conclusion. Gary Porter and Jack Trifts' comprehensive studies using survivorship-bias-free datasets found that while long-tenure managers initially outperformed shorter-tenure peers, this advantage didn't persist beyond 10 years. Their research revealed an inverse relationship between tenure and returns over extended periods.

Why persistence of fund performance is rare

The lack of persistence isn't just disappointing—it's evidence that most outperformance is driven by luck rather than skill. Decades of academic research have identified several factors explaining this phenomenon:

Market efficiency: In liquid, well-researched markets like large-cap U.S. stocks, genuine opportunities for consistent outperformance are scarce. Information travels fast, and advantages quickly disappear.

Statistical reversion: Burton Malkiel's influential 1995 study of mutual fund returns from 1971-1991 found that while some persistence existed in the 1970s, it vanished in the 1980s as markets became more efficient. Malkiel emphasized that survivorship bias was more significant than previously estimated, inflating apparent persistence rates.

The skill vs luck challenge: Even when sophisticated performance measures suggest skill exists, the evidence remains limited. Bradford Jordan and Timothy Riley's 2016 research using a six-factor model found that roughly 65% of managers showed some persistence, but only 15% maintained returns above fees over 14 years—hardly compelling odds for investors.

Extended underperformance periods: Perhaps most troubling for performance-chasing investors, Paul Kaplan and Mo Kowara's 2019 simulations demonstrated that even managers with genuine skill can experience underperformance for periods exceeding 10 years due to market cycles and random variation.

The graveyard of underperformers

While top performers struggle to maintain their edge, poor performers face an even grimmer fate. The S&P data reveals that 25% of worst-quartile domestic equity funds from 2014-2019 were either merged or liquidated within five years. In contrast, only 7% of top-quartile funds suffered the same fate.

This creates a troubling dynamic: successful funds tend to survive (even if their performance deteriorates), while unsuccessful funds disappear from view, creating an illusion that performance is more persistent than it actually is. This survivorship bias has been a consistent finding across academic studies, with researchers like Porter and Trifts noting that manager longevity relates more to avoiding catastrophic underperformance than to sustained outperformance.

Active share and other persistence factors

Some research has identified characteristics associated with better persistence, though these findings come with important caveats. Martijn Cremers and Antti Petajisto's groundbreaking 2009 study introduced the concept of "Active Share"—a measure of how much a fund's holdings differ from its benchmark—and found that high Active Share funds demonstrated stronger persistence and outperformance.

However, even these seemingly skill-based advantages proved limited. The persistence was not universal and appeared concentrated in specific market segments and time periods rather than representing a broad pattern of sustained active management success.

Clare's research also identified some persistence-related characteristics, finding that small-cap bias and low fees were traits linked to better risk-adjusted performance among long-serving managers. But these effects varied significantly by market conditions and were not consistently predictive.

Fixed income: a slightly better story

Active management in fixed income markets shows marginally better persistence, though still far from compelling. Among top-quartile investment-grade intermediate and high-yield funds from 2022, 17% and 12% respectively maintained their rankings over the subsequent two years according to the S&P data.

While better than equity results, these figures hardly justify the typically higher fees charged by active bond managers, especially when considering that bond index funds offer reliable, low-cost exposure to these markets.

Regional and temporal variations

The academic evidence suggests that persistence may vary by market and time period. Javier Vidal-García's 2013 study of European mutual funds found statistically and economically significant persistence for up to 36 months (3 years), suggesting possible regional differences in market efficiency.

However, these regional effects don't fundamentally alter the long-term picture. Most studies focusing on 10-year or longer horizons find minimal evidence of sustained outperformance regardless of geography.

Practical implications for investors

This research has profound implications for how we should approach fund selection:

Stop chasing performance: Historical returns are poor predictors of future success. Five-star ratings and impressive track records tell us more about past luck than future skill. As Davis's research showed, even style-based selection strategies fail to generate positive abnormal returns over the long term.

Focus on costs: Since skill is rare and unpredictable, fees become the primary differentiator between funds. Lower costs provide a more reliable path to better net returns—a finding consistent across decades of research.

Embrace consistency: Index funds offer something active managers struggle to deliver—predictable, consistent market returns minus minimal fees. The academic evidence overwhelmingly supports this approach for most investors.

Understand the odds: If you insist on active management, recognize you're making a bet against overwhelming odds. The probability of selecting a manager who will consistently outperform is vanishingly small, and even apparently skilled managers can underperform for extended periods.

The uncomfortable truth

The persistence research forces us to confront an uncomfortable reality: the investment industry has built a massive superstructure around a premise that simply doesn't hold up to scrutiny. Billions are spent on research, analysis, and manager selection based on the belief that past performance provides meaningful insights into future results.

The evidence suggests otherwise. From Davis's early work through the latest S&P Persistence Scorecard, study after study has reached the same conclusion: in the ruthlessly efficient world of public markets, sustained outperformance is so rare that investors would be better served accepting market returns through low-cost index funds rather than engaging in the futile search for the next great manager.

This doesn't mean active managers lack skill or that markets are perfectly efficient. Rather, it means that any edge these managers possess is typically modest, temporary, and overwhelmed by costs and the natural forces of mean reversion. As Kaplan and Kowara's simulations demonstrate, even genuine skill can be masked by extended periods of underperformance that test the patience of any investor.

For evidence-based investors, the message is clear: when it comes to fund performance, persistence is not just rare — it's nearly extinct. The sooner we accept this reality, the better our investment outcomes will be.

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