For mutual fund investors, “persistence is all that matters,” according to a recent article in Barron’s, but decoding performance track records can be a challenge.

“Active managers can beat the market,” the article says, “but whether they do so by skill or luck is harder to determine.”

The article cites results from S&P’s biannual persistence study, a survey which examines whether funds that have beat their benchmarks or peer groups are likely to continue their outperformance. The study found that less than half of the top-performing funds as of September 30, 2017 finished it the top quartile in 2018. Further, it found that the number dropped to 8% in 2019.

The article notes, “Active managers, however, might be better than S&P suggests. In demanding that funds outperform every consecutive year rather than looking at longer time periods, the firm substitutes demand of short-term consistency for persistence. And in confusing unrealistic consistency for persistence, the research firm also may encourage the kind of attention to one-year returns that it’s trying to dispel.”

The article cites comments from CFRA head of mutual fund research Todd Rosenbluth, who says, “Looking at one-year winners and expecting them to remain at the top every year is an extremely high bar to exceed.” The article argues that a better approach would be to “give up the one-year initial period entirely, and test three- or five-year outperformers over the subsequent three- or five-year period on a cumulative or annualized basis.”

The article concludes that investors should not hold active managers to unrealistic standards: “In fact, we’d argue that investors should be alarmed, not reassured, by a long string of consistent short-term outperformance. Instead, investors should expect some bad years, and demand that active funds outperform for at least a five-year period, and preferably over a full cycle.”