Larry Swedroe, Director of Research, 3/18/2019
Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) Scorecard, which compares the performance of actively managed equity mutual funds to their appropriate index benchmarks.
Most Recent Data
The 2018 report includes 15 years of data. Following are some of its highlights:
- In 2018, 69% of all domestic funds underperformed the S&P Composite 1500 (in a down year—so much for active managers outperforming in down markets). And 64% of large-cap managers, 46% of midcap managers and 68% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively. However, over longer periods, the results were dismal.
- Over the five-year period ending 2018, 84% of large-cap managers, 85% of midcap managers and 91% of small-cap managers lagged their respective benchmarks. Similarly, over the 15-year investment horizon, 92% of large-cap managers, 93% of midcap managers and 91% of small-cap managers failed to outperform on a relative basis. Note the poor performance in small-caps, supposedly the most inefficient asset class, where just 9% of active funds outperformed their benchmark index. Even worse was the performance turned in by small-cap growth managers, where 98% underperformed. The least poor performance was in large value, where 79% failed to beat their benchmark.
- In 2018, the majority of active managers investing in global (71%), international (77%), international small (68%) and emerging market (78%) funds underperformed their respective benchmarks. Again, the results deteriorated as the horizon lengthened.
- Over the three-, five-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks, and the longer the time horizon, in general, the more funds underperformed. For example, over the 15-year horizon, 83% of global funds underperformed, 90% of international funds underperformed, 76% of international small funds underperformed and 96% of those supposedly inefficient emerging market funds underperformed.
- Over the last 15 years, on an equal-weighted (asset-weighted) basis, the average actively managed U.S. equity fund underperformed by 1.43 (0.73)% per annum. Again, the worst performances were in the small-cap category, with active small-cap growth managers underperforming on an equal-weighted (asset-weighted) basis by 3.08 (1.94)% per annum, active small-cap core managers underperforming by 2.79 (1.85)% per annum and active small value managers underperforming by 2.06 (1.87)% per annum, respectively. So much for the idea that the asset class is inefficient.
- Over the three-, five-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their respective benchmarks. For example, over the 15-year horizon, 82% of active global funds underperformed, 92% of international funds underperformed, 78% of international small-cap funds underperformed, and in the supposedly inefficient emerging markets, 95% of active funds underperformed.
- Over the 15-year horizon ending 2018, on an equal-weighted (asset-weighted) basis, active global funds underperformed by 1.36 (0.35)% per annum, active international funds underperformed by 1.78 (0.71)% per annum, active international small funds underperformed by 0.91 (0.09)% per annum, and in the supposedly inefficient asset class of emerging markets, active funds produced the worst performance, underperforming by 2.64 (1.50)% per annum, respectively.
- The performance in fixed-income funds was also poor. Across the 14 categories, in just two did the majority of active funds outperform (long-term government and long-term investment grade). Over the 15-year period, in no category did the majority outperform, in only two less than 80% underperformed, in four more than 90% underperformed and in high-yield funds, the worst-performing category, 99% underperformed. On an equal-weighted basis, the underperformance ranged from 0.60% (general muni funds) to as much as 3.08% (government long funds). The news was better on an asset-weighted basis, with active funds outperforming in two categories: investment-grade intermediate (0.25%) and global income (0.89%). In the other 12 categories, the underperformance was more than 2% in two categories (long-term government and long-term investment grade), 1.5% in a third category (high-yield) and 0.8% in emerging market bonds.
- Highlighting the importance of accounting for survivorship bias, over the 15-year period, 57% of domestic equity funds, 54% of international equity funds, 31% of international small funds and 32% of emerging market funds were merged or liquidated. Across the 14 bond fund categories, the merger and liquidation rate ranged from a high of 65% (government intermediate funds) to a low of 32% (global income funds).
While I believe the preceding data is compelling evidence of the active management industry’s failure to generate alpha, it’s important to note that all the report’s figures are based on pretax returns. Given that actively managed funds’ higher turnover generally makes them less tax efficient, on an after-tax basis, the failure rates would likely be much higher (taxes are often the greatest expense for active funds).
The SPIVA Scorecards continue to provide powerful evidence of the persistent failure of active management’s ability to generate alpha (risk-adjusted outperformance). In particular, they serve to highlight the canard that active management is successful in supposedly inefficient markets (like small-cap stocks and emerging markets).
The scorecards also provide compelling support for Charles Ellis’ observation that, while it’s possible to win the game of active management, the odds of doing so are so poor that it’s not prudent to try—which is why he called it “the loser’s game.” And it’s why we continue to see a persistent flow of assets away from actively managed funds.
This commentary originally appeared March 13 on ETF.com
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