It’s funny.. Every time the results are pretty much the same, but for nerdy investment journalists like me, there’s still a frisson of excitement when S&P Dow Jones releases its SPIVA scorecard.
SPIVA stands for S&P Indices Versus Active Funds, and the scorecard is a measure of how actively managed funds have performed relative to their benchmark. First published in 2002, the US scorecard has consistently shown how, over time, only a small fraction of funds succeed in beating the index. The figures for 2014 were the worst on record for active funds.
But in case you’re thinking it’s only US fund managers who are struggling to justify their existence, take a look at the SPIVA scorecard for Europe, which has just been released. Now in its second year, the Europe scorecard does offer a few small crumbs of comfort for the fund industry. Active underperformance is less pronounced than it is in the States, and UK managers have performed slightly better (or perhaps I should say less badly) than their peers. But the overall picture is still extremely bleak for active management and its advocates.
Predictably, the trade press has focussed on short-term performance, which in some cases is surprisingly respectable. For example, 82% of UK equity funds beat their benchmark over the 12-month period to the end of June this year. But in every category, the rate of outperformance quickly tails off. For example, 89% of global funds and 91% of US equity funds fail to beat the market over five years. Over ten years, the figures are worse still.
The latest scorecard also exposes the myth, repeatedly pedalled by the industry, that active managers perform better in less well-researched (and supposedly less efficient) markets. Even over 12 months, for example, 79% of emerging market funds and 85% of UK small-cap funds have failed to beat the index.
But, for me, the most shocking figures are those for fund survivorship. Closing underperforming funds or merging them with other funds to make their performance look better is a trick that fund management companies have played on consumers for decades. But product turnover appears to have reached epidemic proportions. Just 46% of UK equity funds that existed 10 years are still in existence today; the figure for UK large and mid-cap equity funds is just 41%.
Think about that for a moment. People typically invest for retirement over a period of more than 40 years; children today will likely invest for longer than that. In that context 12-month performance figures are virtually irrelevant. The SPIVA figures put the odds of your chosen active fund beating the index over the next ten years at less than one in five, and there’s a better-than-even chance that by then it won’t even exist. The odds of your fund still being around in 40 years’ time and having beaten the index over that period is miniscule.
Everyone likes to think they’ve chosen a winning fund. But this is a zero-sum game; one manager has to win at another manager’s expense. Half of managers will produce above-average performance, and half will deliver below-average performance. Past performance is no guide to future performance, and should your fund turn out to be one of the long-term losers (of which there’ll be many), you really would be out of pocket.
And remember, choosing active funds over low-cost passive funds is not a frivolous flutter. This isn’t a penny slot machine you’re feeding. The compounded costs of active management, over time, are staggeringly huge. The price difference between an active and a passive strategy for a typical UK investor saving for retirement is somewhere around £300,000 — the equivalent of nine Porsche cars or a typical family home.
Be under no illusions. The stakes really are that high. Think very carefully before you place your bet.
(Featured image: Casper Zoethout, CC BY-SA 2.0)