Canada joined markets around the world facing extraordinary volatility in 2020, strongly selling off February highs before rebounding, as the scale and management of the pandemic grew clearer. The S&P/TSX Composite posted a respectable 5.6% gain for the year, and the smaller-cap names of the S&P/TSX Completion finished slightly ahead with a 6.0% return. However, both of these returns were well below the 16.3% gained by the S&P 500® (CAD) and other global benchmarks.

Although this volatile period offered ample opportunity for stock-pickers to shine, 88% of Canadian Equity funds underperformed their benchmark in 2020, in line with the 84% that did so over the past 10 years. This shortfall was widespread, as a majority of funds underperformed in five of the seven categories in 2020. Over the past decade, a majority of managers in every fund category lagged their benchmarks (see Report 1).

Canadian Equity funds were particularly notable for their level of underperformance. On an equal-weighted basis, Canadian Equity funds returned a bleak 4.8% below the S&P/TSX Composite over the past year, the worst relative performance of any fund category (see Report 3).

Canadian Small-/Mid-Cap Equity funds had a banner year, as just 22% failed to beat the S&P/TSX Completion. These funds were particularly deserving of praise for gaining an average of 14.3% on an equal-weighted basis—8.3% clear of the benchmark. Results were somewhat less triumphant over longer horizons though, as 71% and 91% of funds fell short over the three- and five-year periods, respectively (see Reports 1 and 3).

Canadian Dividend & Income Equity funds took second place among fund categories, with just 44% lagging the S&P/TSX Canadian Dividend Aristocrats^{® Index} in 2020. This was also the only category with negative returns for 2020; the index lost 2.3% on the year, and on an equal-weighted basis, the funds lost 1.2%. This picture reverted to form over the 10-year horizon, as the index led (7.1% annualized return) and the funds followed (5.3% annualized return, with 91% of funds performing worse than the index; see Reports 1 and 3).

Among Canadian Focused Equity funds, 71% lagged the blended benchmark, which comprises the S&P/TSX Composite (50%), the S&P 500 (CAD) (25%), and the S&P EPAC LargeMidCap (CAD) (25%). Canadian Focused Equity funds were also notable for having the worst chances of beating the index over the 10-year period, with just 4 of 128 funds (3.1%) surpassing the blended target. Asset allocators punished these funds heavily, as only 37% of funds survived the decade, the worst survivorship of any category (see Reports 1 and 2).

Funds looking outside of Canada provided some respite from poorer domestic returns, although active management still broadly failed to add value. U.S. Equity funds posted the highest returns over the past year, with a 13.6% gain on an equal-weighted basis and 17.4% on an asset-weighted basis. However, 69% of funds failed to clear the returns of the S&P 500 (CAD) over the past year. Similarly, U.S. equities offered the best returns over the past decade, with the S&P 500 (CAD) gaining 16.8% per year, but active funds were unable to keep up: 95% fell short, by an average of 4.1% per year on an equal-weighted basis (see Reports 1, 3, and 4).

International Equity funds did slightly better on a relative basis over the past year, with 60% underperforming. Nonetheless, the average equal-weighted performance was 7.0%, well shy of the 9.0% gain of the S&P EPAC LargeMidCap (CAD). Global Equity funds put up a feeble defense of active management, with 78% underperforming the 14.9% gain of the S&P Developed LargeMidCap, with an average equal-weighted performance of just 10.8% (see Reports 1 and 3).

Larger funds in Canada tended to outperform their smaller counterparts, as 22 of the 28 results showed higher asset-weighted returns across the seven fund categories and four time horizons studied (see Reports 3 and 4).

The SPIVA Scorecards' accounting for survivorship bias continues to provide a valuable caution for asset allocators, as 54% of all funds in the eligible universe 10 years ago have since been liquidated or merged (see Report 2).

SUMMARY

The year 2020 was tumultuous for financial markets. The COVID-19 pandemic threw the world into chaos early in the year, with the S&P 500^® falling 33.8% between Feb. 19, 2020, and March 23, 2020. Governments and central banks pulled out their playbooks from the global financial crisis of a decade earlier and acted swiftly to increase spending and ease monetary policy. Financial markets rapidly recovered, with the S&P 500 regaining its all-time high by August and ending the year up 18.4% after shrugging off U.S. election histrionics.

The torrent of liquidity depressed interest rates and pushed up asset prices nearly everywhere investors looked. Of the 31 distinct benchmarks tracked by this report, 30 finished with a positive return for 2020; the S&P United States REIT (-7.5%) was the only exception.

The positive market performance broadly translated into good absolute returns for active fund managers. While the turmoil and disruption caused by the pandemic should have offered numerous opportunities for outperformance, 57% of domestic equity funds lagged the S&P Composite 1500^® during the one-year period ending Dec. 31, 2020.

Large-cap funds picked up where they left off the previous decade—for the 11th consecutive one-year period, the majority (60%) underperformed the S&P 500. Mid-cap (51%) and small-cap (46%) funds did somewhat better relative to the S&P MidCap 400^® and S&P SmallCap 600^®, respectively.

The ongoing growth versus value battle firmly tilted toward growth in 2020. The pandemic boosted the fortunes of those positioned to take advantage of changing lifestyles, with the S&P 500 Growth returning 33.5%, while the S&P 500 Value managed a meager 1.4%. A healthy 62% of large-cap growth funds, 83% of mid-cap growth funds, and 86% of small-cap growth funds topped the S&P 500 Growth, S&P MidCap 400 Growth, and S&P SmallCap 600 Growth, respectively. However, this did little to improve their longer-term relative performance, as on a 20-year horizon a paltry 4%, 10%, and 6% of large-, mid-, and small-cap growth funds beat their benchmarks, respectively.

Active value funds posted more mixed results. While 67% of large-cap value funds beat the S&P 500 Value, just 47% of mid-cap value funds and 56% of small-cap value funds were able to do so. Nevertheless, 20-year results showed a similar decline to growth funds, as just 23%, 15%, and 24% of large-, mid-, and small-cap value funds outperformed their benchmarks, respectively.

For U.S. funds looking outside of the country, relative results in 2020 were a toss-up. Roughly 50% of global, international, international small-cap, and emerging markets funds beat the S&P Global 1200, S&P International 700, S&P Developed Ex-U.S. SmallCap, and S&P/IFCI Composite, respectively. This clustering artifact remained, but the poor results widened when viewed over three years (about 60% underperforming), five years (about 70%), or 20 years (about 90%).

Gorging on central bank largesse, the long-tenor bonds of the Bloomberg Barclays US Government Long returned a spectacular 17.6% for the year. The government long funds charged with targeting this index failed in spectacular fashion, as fewer than 6% were able to clear this hurdle. In 3 of the 14 fixed income categories tracked (government long funds, investment-grade long funds, and loan participation funds), more than 90% of funds failed to clear their benchmarks in 2020. Better results were generally found in the intermediate and shorter-dated tenors for 2020.

Echoing the results from equities, longer observation horizons offered little sanctuary. More than 60% of funds underperformed their benchmarks across all fixed income categories over the 15-year horizon; in 10 of the 14 categories tracked, more than 80% of funds came up short.

The SPIVA Scorecard's accounting for survivorship bias continues to be a valuable cautionary tale. As has generally been the case in recent years, roughly 5%-10% of funds across asset classes and categories were merged or liquidated in 2020. Over 20 years, nearly 70% of domestic equity funds and two-thirds of internationally focused equity funds across segments were confined to the history books.

SUMMARY

• S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the SPIVA^® U.S. Scorecard in 2002. Over the years, we have built on our 18 years of experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.
• The SPIVA Australia Scorecard reports on the performance of Australian active funds against their respective benchmark indices over different time periods. In this scorecard, we evaluated returns of over 897 Australian equity funds (large, mid, and small cap, as well as A-REIT), 475 international equity funds, and 112 Australian bond funds.
• Strong recovery was seen in equity markets after sell-offs in February and March 2020. Apart from Australian A-REIT funds, the majority of active funds across various equity fund categories, Australian Equity General, Australian Equity Mid- and Small-Cap, and International Equity General, outperformed their respective benchmarks in the second half of 2020.
• Average Australian Bond funds started outperforming the benchmark since April 2020. In the second half of 2020, more than 80% of Australian Bond funds beat the S&P/ASX Australian Fixed Interest 0+ Index with an equal-weighted average excess return of 0.7%.

• Australian Equity General Funds: The S&P/ASX 200 gained 13.2% in the second half of 2020, while Australian Equity General funds enjoyed higher returns of 14.6% and 15.0% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending December 2020, only 39.3% and 55.6% of funds were beaten by the benchmark, respectively, which were much lower than the observations over the 3- and 5-year horizons.  However, over 7% of funds in this category were liquidated in 2020.
• Australian Equity Mid- and Small-Cap Funds: The S&P/ASX Mid-Small had a strong return of 21.7% in the second half of 2020, while the Australian Equity Mid- and Small-Cap funds recorded bigger gains. Funds with smaller assets tended to suffer more losses during the first half of 2020, but they tended to perform better during the recovery in the second half, with the equal-weighted returns exceeding the asset-weighted return by more than 1%.  Over the 6- and 12-month periods ending December 2020, 34.1% and 53.0% of funds failed to outperform the benchmark, respectively.
• International Equity General Funds: The international equity market recorded smaller gains than the Australian equity market in the second half of 2020. The S&P Developed Ex-Australia LargeMidCap marked a return of 10.2% and more than half of the International Equity General funds outperformed the benchmark over this period.  Over the 6- and 12-month periods, the equal-weighted returns exceeded the asset-weighted returns by 1.7% and 2.3%, respectively, indicating funds with smaller assets tended to perform better than their peers with larger assets in the past year.
• Australian Bond Funds: The S&P/ASX Australian Fixed Interest 0+ Index recorded a narrow gain of 0.9% in the second half of 2020, though the Australian Bond funds recorded higher returns of 1.6% and 1.8% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending December 2020, only 16.7% and 39.4% of funds underperformed the benchmark in this category, which was the most favorable among active funds across all SPIVA fund categories.
• Australian Equity A-REIT Funds: The S&P/ASX 200 A-REIT gained 21.2% in the second half of 2020, though more than half of the Australian Equity A-REIT funds underperformed the benchmark, recording slightly smaller returns of 20.7% and 20.4% on equal- and asset-weighted bases, respectively. In 2020, 54.5% of funds in this category did not outperform the benchmark and the equal- and asset-weighted average returns lagged the benchmark return by 1.3% and 1.7%, respectively.
• Fund Survivorship: In 2020, the overall fund liquidation rate across all categories was 6.1%, which was higher than the rate of 3.5% in 2019. The highest liquidation rates were seen in the Australian Equity General and Australian Equity A-REIT fund categories.  In 2020, 7.1% of Australian Equity General funds were liquidated, compared with 1.8% in 2019.  The liquidation rate of Australian Equity A-REIT funds was 7.6% in 2020, much higher than the rate of 2.9% recorded in 2019.

INTRODUCTION

• In the active versus passive investment debate, a manager’s ability to deliver consistently above-average returns is key. Persistence in performance is one way to differentiate skill from luck.
• In this report, we measure the performance persistence of active funds in Brazil, Chile, and Mexico that outperformed their peers over consecutive three- and five-year periods. We also analyze how their performance ranking changed over subsequent periods.

SUMMARY OF RESULTS

Brazil

• The percentage of Brazil Equity Funds and Brazil Large-Cap Funds top performers that remained in the top quartile after 12 months fell drastically compared with the previous report (from 33% to 13% and 33% to 19%, respectively), as shown in Exhibit 1.
• Exhibit 2 highlights the inability of top-performing equity fund managers to consistently replicate their success in subsequent years.
• Among fixed income funds, Brazil Government Bond Funds had similar results to Brazil Equity Funds. Brazil Corporate Bond Funds performed slightly different; while the majority of managers did not maintain consistent outperformance for five years in a row, a notable 21% of them did (see Exhibit 2).
• The five-year transition matrix (see Exhibit 5) highlights three categories: equity, large-cap equity, and government bond funds. The chance of a winning fund remaining in the top quartile after five one-year periods was higher than the chance of it liquidating.
• Half of the top-quartile funds in the Brazil Corporate Bond Funds category remained in the top quartile and the other half were merged or liquidated (see Exhibit 5).

Chile

• A majority of Chilean top-performing equity funds (56%) stayed in the top quartile for two consecutive years, but just 11% stayed the third year (see Exhibit 1).
• Exhibit 2 demonstrates the lack of persistence by equity managers in Chile—just 10% of top performing funds in the first 12-month period repeated their outperformance after three years. None of the top-performing funds persisted after five years.
• Top-quartile managers in the first period of the three-year transition matrix that maintained their top-quartile status in the second period were more likely to stay in the first quartile (44%) than to move to lower quartiles (see Exhibit 3).
• The five-year transition matrix showed a lack of resilience among managers in the second quartile, with 70% of Chile Equity Funds being merged or liquidated (see Exhibit 5).

Mexico

• Of the funds in the Mexico Equity Funds category, 17% stayed in the top quartile for three consecutive years (see Exhibit 1).
• The five-year performance persistence test (see Exhibit 2) shows that top-quartile managers had difficulty replicating their outperformance in subsequent years. For the first and second one-year periods, just 9% of managers remained in the top quartile, and by the third year, none of them remained.
• Exhibit 6 shows that top-half managers in the first five-year period were resilient; 93% of them survived in the second five-year period.

EXECUTIVE SUMMARY

• While comparing active funds against a benchmark index is a typical practice used to evaluate their performance, persistence is an additional test that reveals fund managers’ skills in different market environments.
• In this report, we measure the performance persistence of active funds that outperformed their peers and benchmarks over consecutive three- and five-year periods, and we analyze their transition matrices over subsequent periods.
• A minority of Australian high-performing funds persisted in outperforming their respective benchmarks or consistently stayed in their respective top quartiles for three consecutive years, and even fewer maintained these traits consistently for the five-year period.

• Out of the top-performing funds in the 12-month period ending June 2016, only 1.0% persistently maintained a top-quartile rank, and 2.0% consistently beat their benchmarks in the following four consecutive years.
• Over two successive three- and five-year periods, the majority of outperforming funds failed to persistently beat their respective benchmarks, and most funds in the top quartile did not stay there consistently.
• Out of the 166 Australian funds that ranked in their respective top quartile in the five-year period ending June 2015, only 31.3% of them remained in the top quartile, and 11.4% were liquidated or merged in the subsequent five-year period.
• Out of the 258 Australian funds that outperformed their respective benchmark in the five-year period ending June 2015, only 28.7% continued to outperform their respective benchmark in the following five-year period, and 14.7% of them were liquidated.
• Overall, the majority of Australian fund categories showed weak performance persistence in top-performing funds across the three- and five-year periods.