S&P: A Good Fund May Not Stay That Way

August 14, 2006 (PLANSPONSOR.com) - Investors who find a top-performing mutual fund should enjoy a good thing while they have it, according to a Standard & Poor study.

A Standard & Poor news release said that through June 30, 2006, its scorecard shows that very few funds manage to consistently repeat their top half or top quartile performance.

According to the announcement, over five years ending June 30, 2006, 58 (10.8%) large-cap funds, 12 (7.9%) mid-cap funds and 19 (7.7%) small-cap funds kept their hold on a top-half ranking over five consecutive 12-month periods. A total of three large-cap funds (1.12%), zero mid-cap funds and one small-cap fund (0.81%) maintained a top-quartile ranking over the same period.

“Our research has found that consistent, top performing funds tend to share similar characteristics, in particular, more experienced management teams which can successfully maneuver their funds through volatile markets,” Standard & Poor’s Mutual Fund Strategist Rosanne Pane said in the news release. “Consistent, top performers also tend to have lower expense ratios and minimize the expense drag on performance.”

Looking at longer time horizons, only 17.5% of large-cap funds with a top quartile ranking over five years ending June 30, 2001 maintained that level over the next five years ending June 30, 2006. Only 6.8% of mid-cap funds and 18.7% of small-cap funds repeated their top quartile performances over the same period.

According to the news release, 36.3% of large cap funds, 26.4% of mid cap funds and 47% of small cap funds with a top half ranking over five years ending June 30, 2001 stayed there over the next five years ending June 30, 2006.

Fourth quartile funds continue to have a higher probability of disappearing. The five-year transition matrix notes 41.9% of large-cap, 41.9% of mid-cap and 39.2% of small-cap 4th quartile funds disappeared due to mergers or liquidations, the news release said. 

Standard & Poor’s Mutual Fund Performance Persistence is available at  www.standardandpoors.com .