Key Takeaways
- Persistent fund outperformance does exist, but it is uncommon and often linked to risk exposures.
- In categories with greater pressure from active managers, or where low-cost passive alternatives are readily available, performance advantages are less likely to endure.
- Past performance appears more useful for identifying funds that may continue to struggle.
Investors often rely on past performance when selecting funds. Strong historical returns are easy to observe and compare, and are frequently highlighted in rankings, recommendations, and financial media. As a result, funds that have outperformed their peers often attract greater investor interest and inflows, as their track records are commonly interpreted as signals of quality or managerial skill.
The important question, however, is whether past results tend to persist. Our study of Europe-domiciled equity and fixed-income funds from 2010 through 2025 finds that strong performance is hard to sustain. Funds that ranked near the top of their category in one year had only a limited chance of remaining there the following year. Many moved back toward the middle, and some fell to the bottom.
Strong recent returns can be a useful starting point for analysis, but they are rarely enough on their own. As the table below shows, among funds that ranked in the top quintile in one year, 25.0% stayed there the following year, and nearly the same share, 24.6%, either fell to the bottom quintile or disappeared through a merger or liquidation.
Persistence Scorecard: One-Year Persistence of Actively Managed Funds
The signal is clearer on the downside. Bottom-ranked funds were more likely to remain weak or disappear than to recover meaningfully: 34.9% stayed in the bottom quintile or were merged or liquidated, while only 17.8% climbed to the top quintile. Past performance therefore appears more useful for identifying funds that may continue to struggle than for finding recent winners that will keep winning.
One reason performance persistence can be difficult to interpret is that not all of it reflects manager skill, and it can be associated with consistent risk exposures. Among equity funds, persistence is closely linked to stock market momentum. Persistence among active equity funds tends to rise when momentum returns are strong. Funds tilted toward recent winners benefit when market leadership continues, making them more likely to remain top performers. But the same exposure can become a headwind when momentum reverses, particularly in volatile markets. This suggests that some apparent persistence reflects a rewarded market factor—or risk exposure—rather than consistently superior stock selection.
If past performance alone is not enough, fees are one of the clearest and most practical signals in our study. Lower-cost funds have a better chance of staying near the top, while higher-cost funds are more likely to remain near the bottom.
Active Funds Performance Persistence Over Various Horizons
Cheaper Funds Have an Advantage
Among cheap funds, 25.9% stay in the top quintile, versus just 18.1% for expensive funds. The gap is even wider at the bottom: 41.4% of expensive funds remain in the bottom quintile or are merged or liquidated, compared with 29.2% of cheap funds. Overall, lower fees do not guarantee success, but they give funds a meaningful advantage. Higher fees create a hurdle that must be overcome year after year.
A range of other fund characteristics is also linked to performance persistence. Smaller funds and those experiencing outflows are more likely to exhibit sustained weakness. Competitive dynamics also appear to matter: in categories with greater pressure from active managers, or where low-cost passive alternatives are readily available, performance advantages are less likely to endure. The Morningstar Process rating likewise helps identify funds with a higher likelihood of sustaining strong performance.
Investors should be cautious about assuming that recent winners will keep winning. Persistent outperformance exists, but it is uncommon and often linked to risk exposures. Poor performance, high fees, and an increasingly competitive environment are more reliable warning signs. For long-term investors, the evidence suggests a more reliable approach than relying on recent returns: placing greater weight on costs, risk, investment process, and whether past performance can be explained in a consistent and repeatable way.
This article is taken from the Morningstar report, Persistence in European Mutual Fund Performance.
