Persistence of outperformance - another Rick Ferri note

Thought this was a great quick read:

Former top mutual funds are falling behind their peer groups in record numbers. Overall, only 42 percent of past winning US equity funds for the five years ending in September 2006 stayed in the top half over the next five-year period ending in September 2011. Another 44 percent fell to the bottom half of the rankings and the remaining 14 percent went out of business. This is according to the most recent Persistence Scorecard on mutual fund performance published by Standard and Poor's.

Etc. Of course, Ferri's the author of books about ETFs and passive investing, but he's also pretty careful with numbers and research. Much of this blog entry of his cites S&P's scorecard of indices vs. active funds which may be found here:

FWIW, I think one of the reasons to consider a *small* slice of active management is for uncorrelated returns. And this is not something he addresses, nor is it addressed by the research he's citing. The vast majority, though, of actively managed funds, are not there for this reason - they are there because someone thinks he's going to beat an index, and do so by enough to overcome his asset management fees. And very rarely is that actually accomplished - and as Rick says, just because someone's done that recently, it doesn't mean they are going to do so again.

--David