Few top-quartile domestic equity funds maintain their performance rankings over a five-year period, according to Standard & Poor's. Only 71, or 13.2%, of large-cap equity mutual funds maintained performance rankings in the top half over the five consecutive years ended Dec. 31, and only 16, or 9.9%, of midcap funds and 24, or 10%, of small-cap funds have done so, according to the S&P Mutual Fund Performance Persistence Scorecard, which tracks consistency of the top-performing mutual funds.
The results suggest that "screening for top-quartile funds as the sole basis for an investment decision is inappropriate," Srikant Dash, S&P index strategist at Standard & Poor's, said in a statement. S&P's research indicates that a large percentage, "and in most cases a majority, of top-quartile funds in the future will most likely come from the ranks of prior-period second and third quartiles," according to the statement.
Looking at longer-term performance, 37% of large-cap, 31.6% of midcap and 47.5% of small-cap funds with top rankings over the five years ended Dec. 31, 2001, maintained top rankings over the next five years, ended Dec. 31, 2006.
The S&P scorecard tracked 1,224 U.S. mutual funds investing in U.S. stocks for the five years, ranking them in comparison with other mutual funds in their style groups and accounting for survivorship bias, said David R. Guarino, an S&P communications manager.
