Inconsistent funds were just as likely to finish top quartile as consistent performers, Morningstar said
Investors should stop looking at consistent performance as a metric when selecting funds, according to research conducted by Morningstar.
The report, entitled Quit Chasing Unicorns: Consistent Fund Performance Is Overrated, found that over a ten-year period inconsistent funds were just as likely to finish top quartile as consistent performers.
According to Morningstar data, of the 1,188 funds that finished in the top quartile of their peer group over the ten years to 30 November 2018, 702 failed to achieve top quartile performance for three years in a row.
Furthermore, of the 486 funds that did manage to achieve top-quartile status over that period, 229 did so just once while only 73 were top quartile for three consecutive years four or more times.
Jeffrey Ptak, global director, manager research at Morningstar, said studies such as S&P Dow Jones Indices’ SPIVA scorecard, which measures the consistency of active funds every six months, has put consistent performance on a “pedestal”, even though it does not belong there.
“Persistence studies suggest you need to outperform like clockwork to be elite,” Ptak continued. “Even the most durably successful funds have bouts of underperformance and thus flunk tests like these.”
However, the report did find that funds managing to achieve top-quartile performance three years in a row over the ten-year period were more likely to survive compared to those that did not manage this feat.
Overall, around 60% of funds that managed top-quartile performance for three consecutive years landed in their category’s top quartile over the full ten-year period, while 8% of those funds closed.
This compares to the funds that did not achieve three successive years of top-quartile performance where