Hunting for Perspective
One of my most impressive accomplishments in college was a months-long streak of predicting which home would be selected during daily episodes of House Hunters. My roommates marveled at what I described as a special ability to read the body language of show participants as they toured potential homes. Then one day, I got one wrong. Then another. After a week of erroneous prognostications, I demanded we find alternative television programming.
I was reminded of this when perusing the persistence test results from this year’s Dimensional Fund Landscape report. The report shows that of the active equity mutual funds and ETFs ranking in the top quartile over a five-year period, only 22% on average repeat the feat in the next five years.
Given the odds are one in four (25%) that any randomly selected fund would rank top quartile, the persistence of outperformance is less than you would expect by chance alone. Many past outperformers will tell stories as impressive as my body language reading skills to explain their returns, but history tells us it was probably luck, and just like my House Hunters exploits, luck eventually runs out.
Disclosures
At the end of each year, funds are sorted within their category based on their five-year total return. The exhibit shows the percentage of funds in the top quartile of five-year performance that ranked in the top quartile of performance over the following five years. Example (2018–2022): For equity funds ranked in the top quartile of performance in their category in the previous period (2013–2017), only 23% also ranked in the top quartile in the subsequent period (2018–2022).
Data SampleThe sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the following Morningstar categories. Non-Dimensional fund data provided by Morningstar. Dimensional fund data is provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded. Index funds, load-waived funds, and funds of funds are excluded from the industry sample.
MethodologyThe beginning samples include funds as of the start of the period. Surviving funds are those with return observations for every month of the sample period. Each fund is evaluated relative to its primary prospectus benchmark. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index. Outperformers are funds that survived the sample period and whose cumulative net return over the period exceeded that of their respective benchmark. We aggregate funds with multiple share classes to the strategy level.
Morningstar Categories (Equity)Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, World Large Stock Blend, World Large-Stock Growth, World Large-Stock Value, and World Small/Mid Stock.
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