Wessels and Krige (2005) studied the performance persistence of equity funds in the South African Unit Trust Industry against the ALSI index benchmark over the period 1988 to 2003. They found that few funds exhibited extraordinary persistence - either in out-performing or under-performing. In general, they found that, over the short term, i.e. month-to-month and quarter-to-quarter basis, there is a tendency that the current performance of a fund would be repeated. That is, there is a greater tendency among the top performing funds to remain top performers. Interestingly,
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Wessels and Krige (2005) discovered that, when the persistence of fund performance is measured on a year-to-year basis, there is less consistency identified among the funds. They, hence, warn investors of the danger of placing their trust in only one active manager in that, in the long run, the performance ranking of managers can assume a random nature if manager skill is not persistent.
Von Wielligh and Smit (2000) used the CAPM model, a two factor APT model and a three factor APT model, to analyse the performance persistence in South African unit trusts from 1988 to 1997. They found evidence of both short term and long term persistence, however, they noticed that the APT models were more powerful than the single factor CAPM model in explaining the relative returns of the portfolios. This is on account of the APT models explaining almost all the cross-sectional variations in expected returns. In their study, Von Wiellligh and Smit (2000), unearthed that the worst performing unit trusts tend to stay worst performers, average performers had the potential of becoming top performers while top performers over time tended to become average performers. Viviers et al. (2009) arrived at a similar conclusion in their study of performance persistence amongst South African mutual funds.
Nana (2012) examined a sample of 151 South African domestic equity unit trusts from 2001 to 2010, to investigate whether these unit trusts are able to outperform the market and if such performance persists. Using six different models, Nana (2012) found no conclusive evidence of outperformance by the unit trusts, although evidence of short run persistence was found. This persistence seemed to decrease over the long run and diminishing completely in some cases. With respect to European markets, Eriksson and Persson (2012 ) found that performance persistence on the Swedish market did actually exist when they tested 8 Swedish mutual fund categories for one-year persistence on the risk- neutral returns. Their study used both an auto-regression of present returns on past returns, and a cross product ratio test between 1992 and 2011. They asserted that notable proof of persistence was found in funds investing in Sweden, Europe and globally.
In the South African context, Keywood (2015) examines the potential for outperformance and persistence among South African unit trusts using the Recursive Portfolio Approach to test for persistence. Results from his study are largely in line with South African literature findings, as short term persistence is
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established for equity, balanced, and fixed-income funds, but not for property funds or other funds. Keywood’s (2015) findings also confirm the South African phenomenon, that persistence is observed to diminish over longer investment horizons. Thomas (2012) improves on an earlier study by Collinet and Firer (2003), in which they had investigated the characteristics of performance persistence amongst South African general equity unit trust funds. Thomas (2012) focused on testing whether the performance of a fund in one period can be used to predict the performance of that fund in a subsequent period. He made the interesting discovery that results for performance persistence studies over longer time periods are highly sensitive to the beginning and ending dates selected in the test being performed.
Thus, from his analysis, no conclusive evidence is found that performance persists over the 1, 2 and 3 year holding periods tested.
Using a sample free of survivorship-bias covering the period 2000-2010, Schiff (2011) found strong evidence of persistence when examining performance persistence of US mutual funds investing in Latin America. The study observed that Latin American funds performing poorly (or well) in any quarter, tend to underperform (or outperform) the market in the subsequent month to a much higher degree than reported for US and alternative emerging market funds. Schiff (2011) suggested that this positive persistence in abnormal returns of formerly well performing funds could be an indicator of the relative inefficiencies in the Latin American equity markets.
This would, in turn, present fund managers with ample opportunities to take advantage of market inconsistencies. However, some South African studies find contrasting results. Scher and Muller (2005) are of the opinion that South African funds are incapable of outperforming the market, when exposure to market, size and value were considered. Their study investigated 106 funds from all equity categories from January 1990 to December 2002, with regard to equity style and persistence of performance.
In particular, Scher and Muller (2005), Hoepner et al. (2011b) found that value funds, and small caps, exhibit negative performance persistence which extends for, at least, two years, whereas small stocks unit trusts are consistently the worst performers, followed by value funds. Their findings imply that portfolio managers are unable to exploit inefficiencies of small cap and value shares and thus a passive portfolio investment would be better.
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