By LARRY SWEDROE
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. The scorecard has persistently shown that a vast majority of active managers fail to outperform appropriate benchmarks, even before taxes are considered. And the longer the horizon, the worse the performance tends to be. My summary of the 2018 report illustrated their persistently poor performance across all equity asset classes.
Most funds underperformed on a risk-adjusted basis
That said, one of the claims of active managers is that they are better able to manage risks than passive indexes. To address that issue, S&P analysed the risk-adjusted performance, using volatility as the measure of risk, of active funds. Their study, Risk-Adjusted SPIVA® Scorecard: Evaluation of Active Managers’ Performance through a Risk Lens, covered periods of up to 15 years. They found that “most active domestic equity managers in most categories underperformed their benchmarks, on a gross-of-fees basis.” They also found that “after adjusting for risk, the majority of actively managed domestic funds in all categories underperformed their benchmarks, on a net-of-fees basis, over mid- and long-term investment horizons.”
Specifically, they found that over the 15-year period ending in 2018, 93.9 percent of domestic funds underperformed the S&P Composite 1500 Index benchmark; 92.2 percent of domestic large-cap funds underperformed the S&P 500 Index benchmark; 90.9 percent of all mid-cap funds underperformed the S&P MidCap 400 benchmark; and in the supposedly inefficient class of small-cap stocks, the performance was the worst, with 94.7 percent underperforming the S&P SmallCap 600 benchmark.
Growth funds performed even worse
The performance was even worse among growth funds, with 99.5 percent of large-cap funds underperforming, 92.1 percent of mid-cap funds underperforming, and 97.0 percent of small-cap funds underperforming. Relatively speaking, active value funds did somewhat better, as “just” 72.6 percent, 86.8 percent and 85.7 percent underperformed, respectively. Relatively speaking, active real estate funds also did better, as 75.9 percent underperformed.
It’s a worldwide story
And the evidence was just as damning internationally. Over the 15-year period, 83.5 percent of global funds underperformed the S&P Global 1200 Index, 91.0 percent of international funds underperformed the S&P 700 Index, 75.9 percent of international small-cap funds underperformed the S&P Developed Ex-U.S. SmallCap Index, and 92.3 of emerging market funds underperformed the S&P/IFCI Composite Index. Again, note that the worst performance was in what is supposedly the most inefficient of the asset classes — emerging markets.
Similar picture in fixed income
The performance of active fixed income funds mirrors that of the active equity universe, with the vast majority underperforming in all 13 asset classes for which there were 15 years of data. Again, we see the worst performance in what is supposedly the most inefficient asset class — emerging market bonds — as 100 percent underperformed! In four other categories (California and New York municipal bond funds, mortgage-backed securities and short-term investment credit), the failure rates exceeded 95 percent. On the other hand, there were just three cases — global income (74.3 percent), long-term investment grade (62.7 percent) and long-term government (64.7 percent) — where the failure rates were below 75 percent.
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 pre-tax 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 serve to highlight the persistent poor performance of active funds and the canard that active management is successful in supposedly inefficient markets like small-cap stocks and emerging markets. It’s why we continue to see a persistent flow of assets away from actively managed funds.
LARRY SWEDROE is an acclaimed author and Chief Research Officer at Buckingham Strategic Wealth.
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