Mutual funds that can deliver consistently stellar returns for a decade are rare creatures indeed, and ones that sustain their dominance for a generation are even more extraordinary.

Investment Executive’s mutual fund manager of the year, despite its name, is an honour we bestow on the exceptional few who have demonstrated impressive performance over 10 years. The reason: anyone can get lucky and shoot the lights out for a year or two, but it’s relatively rare to do it consistently over an extended period.

We look at 10-year records because that represents two typical business cycles, suggesting that managers who can deliver consistent positive returns over that length of time are truly adding value; they aren’t simply riding a rising tide.

Our ranking methodology rewards reliable positive returns. For many investors, the key to building a portfolio is consistency, and negative returns can undermine some otherwise impressive investment performance. It also values strong relative returns — outperforming the competition is essential — and overall cumulative returns for the period.

Given that we look at 10-year records, not surprisingly, the same names seem to appear at the top of our rankings year after year. If you just looked at one or two years of performance, you could expect the list of the top performers to turnover completely. Since we weight all years equally, there’s no reason why recent performance should be considered more valuable than returns earned seven or eight years ago. That’s why the same funds often crop up in our annual research.

In reality, the list of top performers over 10 years changes over time. The turnover is subtle, but it does happen.

For some time, AIC Ltd.’s funds were perennial contenders for our mutual fund manager of the year award. Funds from ABC Funds, managed by I.A. Michael Investment Counsel Ltd., were often at, or near, the top of our annual list. The Chou Associates Management Inc. funds, the Cundill Group funds, and various funds managed by Vancouver-based Phillips Hager & North Investment Management Ltd. have all had spells where they seemed to be dominating the industry with their long-run outperformance. In the past few years, a few dividend funds from bank-owned fund companies have risen to the top of our rankings.

So, over a longer time frame, the list of consistent top performers changes. The top fund managers’ periods of pre-eminence overlap, but none of them have sustained it indefinitely — which points out how tough it is to beat the market over the very long run.

You might think that fund managers that have already proven an ability to beat the rest of the pack over the long run would just extend their advantage, given added years of experience and investment savvy, but it doesn’t work that way. It seems the smart money doesn’t keep getting smarter.

For example, looking back 10 years, the top funds of 1996 (according to our methodology) include familiar names such as the Trimark Fund, AIC Advantage Fund and several funds from PH&N (the PH&N Vintage Fund, PH&N Bond Fund and PH&N US Pooled Pension Fund). The list also includes names that may not be as well known today, such as the Marathon Equity Fund, Formula Growth Fund and the Bullock American Fund.

Fast forward to today, and none of the funds are at the top of our rankings anymore. Funds such as AIC Advantage and PH&N Vintage have faded notably.

The Formula Growth Fund has seen its returns lag over the past 10 years. The fund’s latest performance review disclosure says its compound annual return over the past 10 years is just 4.2%, to Sept. 30. In US$ terms, things look better, it has returned 6.3% over the past 10 years. Although it is still outperforming the indices over 15 years, for the past 10 years it is only just keeping pace with the Nasdaq index, and it’s lagging the Dow Jones index and the Russell 2000 index.

Of the other top performers from 1996, the Trimark Fund and PH&N Bond Fund are still near the top of the rankings for their respective asset classes, but they are far from the top of the overall ranking. Same spot for Marathon Equity, which has since become the Northwest Specialty Equity Fund.

@page_break@Given that few of the funds with outstanding 10-year records in 1996 can claim that they have great 10-year records today, it would seem that past performance — even outstanding, consistent outperformance over a long period of time — is no guarantee of future returns.

If we look at the data another way, however, it appears that many of our past top performers have generated consistent outperformance over the very long-term.

Considering all funds with 20-year records — using the same methodology we apply to 10-year records (based on data supplied by Toronto-based Morningstar Research Inc.), rewarding consistent positive returns, relative performance and absolute 20-year returns — it turns out that some of the past heroes have actually been the strongest performers in the past generation ass well.

The Chou funds (Chou Associates and Chou RRSP), the Cundill funds (both Cundill Security and Cundill Value), a few PH&N Funds (PH&N Dividend Fund and PH&N Vintage Fund), the Trimark Fund and Northwest Specialty Equity (formerly Marathon Equity), all appear among the top 20 funds of the past 20 years, according to our methodology.

Although past mutual fund stars may not be at the very top of the rankings for the most recent 10-year period, they aren’t resting on their reputations either. Some have managed to sustain solid performance over the past 20 years.

Does such wherewithal guarantee top performance from these funds over the next 20 years? Of course not, but it does highlight the fact that superior investment performance is no fluke. Although some of the funds have changed managers over the years, the funds themselves have managed to sustain their winning formula through some pretty diverse market conditions, and they’ve succeeded in a money management business that has evolved a great deal in the past two decades.