DOES PAST PERFORMANCE MATTER?

THE PERSISTENCE SCORECARD

About the Persistence Scorecard
The phrase past performance is not an indicator of future outcomes (or some variation thereof) can be found in the fine print of most mutual fund literature. Yet due to either force of habit or conviction, investors and advisors consider past performance and related metrics to be important factors in fund selection. So does past performance really matter? To answer this question on a continuous basis, the S&P Persistence Scorecard, released twice per year, tracks the consistency of top performers over yearly consecutive periods and measures performance persistence through transition matrices. As in our widely followed SPIVA Scorecards, the University of Chicagos Center for Research in Security Prices Survivorship (CRSP) Bias Free Mutual Fund Database serves as our 1 underlying data source. S&P Dow Jones Indices is one of the worlds leading index providers, maintaining a wide variety of investable and benchmark indices to meet an array of investor needs. Our Index Research & Design team is dedicated to conducting unbiased, in-depth analysis on a broad range of topics and issues facing investors in todays marketplace. This scorecard highlights performance persistence over three- and five-year consecutive 12-month periods and two non-overlapping three- and five-year periods. Key features of the S&P Persistence Scorecard include: Historical rankings without survivorship bias: For anyone making an investment decision, all funds available at the time of that decision are part of the initial opportunity set. Nevertheless, in their persistence calculations, analysts often limit their sample to funds that continue to exist over the complete time period examined, ranking only the survivors. If that happens, funds that liquidate or merge during a period of study are disregarded, biasing measurements of persistence. Using the University of Chicagos CRSP Survivorship Bias Free Mutual Fund Database, the S&P Persistence Scorecard ranks all funds available at each point in time and tracks the top-quartile and top-half performers throughout the time period. This approach accounts for all initially available funds.
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Contributors: Aye M. Soe, CFA Director, Index Research & Design [email protected]
Frank Luo Vice President, Index Research & Design [email protected]

www.spdji.com

The CRSP Survivor-Bias-Free US Mutual Fund Database is the only complete database of both active and liquidated/merged mutual funds. It was created in 1995 and contains fund data from December 1961. Current and historical data from August 1998 has been supplied by Lipper and Thomson Reuters. The fund classifications are based on the Lipper fund classification system.

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Clean universe: The mutual fund universe used in these reports comprises actively managed domestic U.S. equity funds. Index funds, sector funds and index-based dynamic (bull/bear) funds are excluded from the sample. To avoid double-counting multiple share classes, only the largest share class of a fund is used. Transition matrices: Transition matrices show the movements between quartiles and halves over two non-overlapping three- and five-year periods. They also track the percentage of funds that have merged or liquidated. In addition, we monitor movements between capitalization levels. This helps us capture, for example, the conversion of some large-cap funds to mid- and small-cap funds. Tracking reports of top performers: The tracking reports show the percentages of funds that remain in the top-quartile or top-half rankings over three- and five-consecutive-year periods.

SUMMARY OF RESULTS
Very few funds can consistently stay at the top. Out of 703 funds that were in the top quartile as of March 2011, only 4.69% managed to stay in the top quartile over three consecutive 12-month periods at the end of March 2013. Further, 3.35% of the large-cap funds and 6.08% of the small-cap funds remain in the top quartile. It is worth noting that no mid-cap funds managed to remain in the top quartile. For the three years ended March 2013, 16.57% of large-cap funds, 14.22% of mid-cap funds and 23.05% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. Random expectations would suggest a rate of 25%. Looking at longer-term performance, only 2.41% of large-cap funds, 3.21% of mid-cap funds and 4.65% of small-cap funds maintained a top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.25%. While top-quartile and top-half repeat rates have been at or below the levels one expects based on chance, there is consistency in the death rate of bottom-quartile funds. Across all market cap categories and all periods studied, fourth-quartile funds had a much higher rate of being merged and liquidated.

EXHIBITS
Exhibit 1: Performance Persistence Over Three Consecutive 12-Month Periods
Mutual Fund Category
Top Quartile All Domestic Funds 703 30.73 4.69

Fund Count at Start

Mar-11

Percentage Remaining in Top Quartile

Mar-12 Mar-13

All Large-Cap Funds All Mid-Cap Funds All Small-Cap Funds All Multi-Cap Funds Top Half All Domestic Funds

269 102 148 184 Mar-11

30.11 29.41 30.41 32.61 Mar-12

3.35 0 6.08 8.15 Mar-13

1,405

49.75

18.36

All Large-Cap Funds All Mid-Cap Funds All Small-Cap Funds

537 204 295

51.96 49.51 51.53

16.57 14.22 23.05

All Multi-Cap Funds 369 45.26 19.51 Source: S&P Dow Jones Indices. Data as of March 31, 2013. Tables are provided for illustrative purposes. Past performance is not a guarantee of future results.

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Exhibit 2: Performance Persistence Over Five Consecutive 12-Month Periods

Mutual Fund Category
Top Quartile All Domestic Funds 558 11.83 4.3 1.79 0.18

Fund Count at Start

Mar-09

Percentage Remaining in Top Quartile

Mar-10 Mar-11 Mar-12 Mar-13

All Large-Cap Funds All Mid-Cap Funds All Small-Cap Funds All Multi-Cap Funds

187 94 129 148

8.02 11.7 16.28 12.84 Mar-10

5.35 2.13 5.43 3.38 Mar-11

1.6 2.13 1.55 2.03 Mar-12

0 0 0.78 0 Mar-13

Mutual Fund Category

Top Half All Domestic Funds

Fund Count at Start

Mar-09

Percentage Remaining in Top Half

1,115

32.02

15.61

9.87

3.59

All Large-Cap Funds All Mid-Cap Funds All Small-Cap Funds

374 187 258

31.55 29.41 35.27

18.72 10.7 15.89

10.16 9.09 8.53

2.41 3.21 4.65

All Multi-Cap Funds 296 31.42 14.53 11.15 4.39 Source: S&P Dow Jones Indices. Data as of March 31, 2013. Tables are provided for illustrative purposes. Past performance is not a guarantee of future results.

Exhibit 3: Three-Year Transition Matrix Performance Over Two Non-Overlapping Three-Year Periods (Based on Quartiles)
Three-Year Percentage at End Mutual Fund Category
All Domestic Funds

Fund Count at Start (Mar-10)

1st Quartile (%)

2nd Quartile (%)

3rd Quartile (%)

4th Quartile (%)

Merged/ Liquidated (%)

Style Changed (%)

Total (%)

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Large-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Mid-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile

483 483 483 483

23.81 21.12 18.43 19.46

20.91 23.81 18.22 20.08

21.95 22.77 21.74 16.36

24.02 21.53 21.53 15.73

9.32 10.77 20.08 28.36

0 0 0 0

100 100 100 100

170 170 170 170

18.82 20 14.71 16.47

18.24 17.06 19.41 15.29

18.24 21.18 15.29 14.12

22.35 16.47 19.41 11.76

10 15.29 18.82 31.18

12.35 10 12.36 11.17

100 100 100 100

74 73 74

17.57 15.07 12.16

16.22 17.81 8.11

14.86 13.7 16.22

17.57 12.33 10.81

13.51 13.7 13.51

20.27 27.4 39.19

100 100 100

4th Quartile 73 10.96 13.7 10.96 15.07 31.51 17.81 100 Source: S&P Dow Jones Indices. Data as of March 31, 2013. Tables are provided for illustrative purposes. Past performance is not a guarantee of future results.

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Exhibit 3: Three-Year Transition Matrix (continued) Performance Over Two Non-Overlapping Three-Year Periods (Based on Quartiles)
Three-Year Percentage at End Mutual Fund Category
Small-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 112 111 112 111 23.21 16.22 18.75 22.52 12.5 27.03 23.21 18.02 21.43 27.03 19.64 11.71 31.25 15.32 18.75 15.32 6.25 3.6 16.07 28.83 5.36 10.81 3.57 3.6 100 100 100 100

Fund Count at Start (Mar-10)

1st Quartile (%)

2nd Quartile (%)

3rd Quartile (%)

4th Quartile (%)

Merged/ Liquidated (%)

Style Changed (%)

Total (%)

Multi-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 128 128 128 128 17.97 15.63 10.94 16.41 21.09 14.84 10.94 14.06 11.72 17.97 19.53 11.72 14.84 21.88 15.63 8.59 7.81 11.72 20.31 29.69 26.57 17.97 22.66 19.53 100 100 100 100

Performance Over Two Non-Overlapping Three-Year Periods (Based on Halves)

Three-Year Percentage at End Mutual Fund Category
All Domestic Funds Top Half Bottom Half 966 966 44.82 38.1 45.13 37.68 10.04 24.22 0 0 100 100

Fund Count at Start (Mar-10)

Top Half (%)

Bottom Half (%)

Merged/ Liquidated (%)

Style Changed (%)

Total (%)

Large-Cap Funds Top Half Bottom Half 340 340 37.06 32.94 39.12 30.29 12.65 25 11.17 11.76 100 100

Mid-Cap Funds Top Half Bottom Half 147 147 33.33 22.45 29.25 26.53 13.61 22.45 23.8 28.57 100 100

Small-Cap Funds Top Half Bottom Half 223 223 39.46 41.26 47.53 32.74 4.93 22.42 8.07 3.59 100 100

Multi-Cap Funds Top Half 256 34.77 33.2 9.77 22.26 100

Bottom Half 256 26.17 27.73 25 21.09 100 Source: S&P Dow Jones Indices. Data as of March 31, 2013. Tables are provided for illustrative purposes. Past performance is not a guarantee of future results.

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Exhibit 4: Five-Year Transition Matrix Performance Over Two Non-Overlapping Five-Year Periods (Based on Quartiles)
Five-Year Percentage at End Mutual Fund Category
All Domestic Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 403 403 402 403 29.78 21.84 13.43 10.67 23.08 17.62 16.42 18.36 16.13 20.84 20.65 18.11 18.86 16.38 23.13 17.12 12.16 23.33 26.37 35.73 0 0 0 0 100 100 100 100

Fund Count at Start (Mar-08)

1st Quartile (%)

2nd Quartile (%)

3rd Quartile (%)

4th Quartile (%)

Merged/ Liquidated (%)

Style Changed (%)

Total (%)

Large-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 134 134 134 134 11.94 16.42 11.94 20.15 20.15 17.91 11.19 11.19 18.66 17.91 13.43 10.45 23.88 16.42 11.19 8.96 18.66 18.66 28.36 38.81 6.71 12.68 23.88 10.44 100 100 100 100

Mid-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 69 69 69 69 10.14 15.94 10.14 5.8 5.8 8.7 18.84 7.25 14.49 10.14 8.7 8.7 11.59 13.04 7.25 8.7 8.7 18.84 24.64 34.78 49.27 33.33 30.43 34.79 100 100 100 100

Small-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 93 94 93 93 12.9 17.02 25.81 17.2 18.28 25.53 18.28 9.68 26.88 22.34 11.83 11.83 25.81 17.02 15.05 13.98 8.6 11.7 27.96 41.94 7.53 6.39 1.07 5.37 100 100 100 100

Multi-Cap Funds 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile 107 106 107 106 12.15 12.26 6.54 12.26 13.08 7.55 9.35 12.26 9.35 8.49 17.76 7.55 13.08 9.43 10.28 9.43 17.76 29.25 26.17 29.25 34.58 33.01 29.9 29.24 100 100 100 100

Performance Over Two Non-Overlapping Five-Year Periods (Based on Halves)

Five-Year Percentage at End Mutual Fund Category
All Domestic Funds Top Half 806 46.15 36.1 17.74 0 100

Fund Count at Start (Mar-08)

Top Half (%)

Bottom Half (%)

Merged/ Liquidated (%)

Style Changed (%)

Total (%)

Bottom Half 805 29.44 39.5 31.06 0 100 Source: S&P Dow Jones Indices. Data as of March 31, 2013. Tables are provided for illustrative purposes. Past performance is not a guarantee of future results.

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Exhibit 4: Five-Year Transition Matrix (continued) Performance Over Two Non-Overlapping Five-Year Periods (Based on Halves)
Five-Year Percentage at End Mutual Fund Category
Large-Cap Funds Top Half Bottom Half 268 268 33.21 27.24 38.43 22.01 18.66 33.58 9.7 17.17 100 100

Fund Count at Start (Mar-08)

Top Half (%)

Bottom Half (%)

Merged/ Liquidated (%)

Style Changed (%)

Total (%)

Mid-Cap Funds Top Half Bottom Half 138 138 20.29 21.01 24.64 16.67 13.77 29.71 41.3 32.61 100 100

Small-Cap Funds Top Half Bottom Half 187 186 36.9 35.48 45.99 26.34 10.16 34.95 6.95 3.22 100 100

Multi-Cap Funds Top Half 213 22.54 20.19 23.47 33.81 100

Bottom Half 213 20.19 22.54 27.7 29.58 100 Source: S&P Dow Jones Indices. Data as of March 31, 2013. Tables are provided for illustrative purposes. Past performance is not a guarantee of future results.

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S&P Dow Jones Indices Index Research & Design Contact Information
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