104 Financial Conduct AuthorityNovember 2016
MS15/2.2
Asset Management Market Study – Interim Report
Figure6.7 Summary of the existing UK literature on performance persistence
Authors Sample Finding on performance persistence
Blake and
Timmermann
(1998)
209
Almost complete sample of
814 UK open-ended mutual
funds over the 1972 to
1995 time period (Micropal
dataset). Returns calculated
excluding transaction costs or
management fees.
Find that the average UK equity fund
underperformed by ca. 1.8% per
annum (risk-adjusted). Some evidence
of positive performance persistence
among historically best-performing
funds, but also a large average survival
bias of 0.8%peryear. Wide dispersion in
performance between international and
domesticfunds
Quigley and
Sinqueeld (2000)
210
Survivor-bias-free UK equity
data (Micropal dataset) of all
open-ended mutual funds
(unit trusts) over the 1978 and
1997 time period. Limited to UK
(Growth and Income, Growth,
Equity Income or Smaller
Companies) funds invested to at
least 80% in UK equities
Find some limited persistence in
overperformance but to achieve the result
would require an 80% turnover per year
which in practice would increase the
transaction costs to the point of wiping
out any prots. Underperformers persist
longer: "Losers repeat, winners do not."
Fletcher and Forbes
(2002)
211
Sample of 724 unit trusts of
which 139 (General, Income,
and Growth) UK trusts with
continuous returns for the 1982
to 1996 period. Data collected
from the annual Unit Trust
Yearbooks.
Find that persistence in performance
of the mean monthly excess returns is
a short-run phenomenon. However, if
compared to an absolute benchmark,
signicant persistence in the relative
rankings of unit trusts in annual
excess returns turns into signicant
underperformance.
Cuthbertson et al.
(2008)
212
935 (699 surviving funds) UK
open-ended equity mutual
funds over the 1975 to 2002.
Find persistent outperformance of few top
funds and persistent underperformance
"amongst many poorly performing funds."
Also nd that ex post rankings of top
performers are a poor guide for future
performance which "makes it extremely
difcult for the ‘average investor’ to
pinpoint individual active funds which
demonstrate genuineskill.”
6.48 The insights from the literature can be seen by examining data on performance persistence for
funds available to UK investors. Figure6.8 shows that as the time horizon increases from one
up to ten years, more and more GBP-denominated active equity funds (a proxy for active funds
available to UK investors) underperform against their respective benchmarks. For example,
whilst only 22 per cent of UK equity funds underperformed benchmarks in year 1 (2005)
219
,
72% of those funds had underperformed by year 10 (2015). It is important to recognise that
215 Blake, D., Timmermann, A. (1998). Mutual fund performance: Evidence from the UK. European Finance Review 2, 57-77.
216 Quigley, G., Sinquefield, R. (2000). Performance of UK equity unit trusts. Journal of Asset Management 1(1), 72-79.
217 Fletcher, J., Forbes, D. (2002). An exploration of the persistence of UK unit trust performance. Journal of Empirical
Finance9(5),475-493.
218 Cuthbertson, K., Nitzsche, D., O’Sullivan, N. (2008). UK mutual fund performance: Skill or luck? Journal of Empirical
Finance15(4),613-634.
219 The short-term underperformance figure varies materially, and the latest data to June 2016 shows that 86% of UK equity funds
underperformed in year one. However, the 10 year data does not vary significantly, with 77.08% of funds underperforming in the
updated dataset.