S&P’s SPIVA scorecard provides persuasive evidence of the futility of active management. But its most recent scorecard illustrates something else – why active managers underperform even in the best performing asset class.
Q3 2019 hedge fund letters, conferences and more
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 2019 Mid-Year Report includes 15 years of data. Following are some of its highlights:
- Over the 15-year period ending June 2019, 90% of large-cap, midcap and small-cap funds underperformed their benchmark S&P indices. In only one asset class, large value (80% underperformed), was the percentage of underperformers below 86%.
- Over the 15-year period, on an equal-weighted (asset-weighted) basis, the average actively managed U.S. equity fund underperformed by 1.4% (0.74%)per annum. The worst performances were small caps, with active small-cap growth managers underperforming on an equal-weighted (asset-weighted) basis by 1.99% (0.90%) per annum, active small-cap core managers underperforming by 2.43% (1.82%) per annum, and active small–value managers underperforming by 2.00% (1.71%) per annum. So much for the idea that the small-cap asset class is inefficient and active management is the winning strategy.
- Over the 15-year period, across all international equity categories, a large majority of active managers underperformed their respective benchmarks. For example, 82% of active global funds underperformed, 90% of international funds underperformed, 73% of international small-cap funds underperformed, and in the supposedly inefficient emerging markets, 94% of active funds underperformed.
- Over the 15-year period, on an equal-weighted (asset-weighted) basis, active global funds underperformed by 1.32% (0.36%) per annum, active international funds underperformed by 1.83% (0.68%) per annum, and active emerging market funds produced the worst performance, underperforming by 2.34% (1.09%) per annum. And while on an equal-weighted basis, international small-cap funds underperformed by 0.70%, on an asset-weighted basis, they managed to slightly outperform (+0.19%).
- The performance in fixed income funds was also poor. Over the 15-year period, in none of the 14 categories did the majority outperform. Fewer than 82% underperformed in only three cases, more than 90% underperformed in five cases, and 99% underperformed in high-yield funds, the worst-performing category. On an equal-weighted basis, the underperformance ranged from 0.1% (global fixed income funds) to as much as 3.46% (government long-term funds). The news was better on an asset-weighted basis, with active funds outperforming in three categories: investment-grade intermediate-term (0.37%), investment-grade short-term (0.37%) and global income (0.89%). In the other 11 categories, the worst performances were in long-term government (refuting the claim that active managers can time bond markets), underperforming by 2.89%; long-term investment grade, underperforming by 2.3%; and high yield, underperforming by 1.51%.
- Highlighting the importance of accounting for survivorship bias, over the 15-year period, 57% of domestic equity funds, 49% of international equity funds, and 52% of all fixed income funds were merged or liquidated.
Before concluding, there’s one more finding regarding short-term performance that is important to discuss. For the one-year period ending June 2019, while 71% of domestic equity funds underperformed the S&P Composite 1500 – as did the majority of large caps (70%) and multicaps (72%) – midcap and small-cap active funds performed better, with approximately 64% of active managers in both categories beating their benchmarks for the one-year period. Before you jump to any conclusion, we need to discuss the law of style purity, otherwise known as “Dunn’s law.”
Read the full article here by Larry Swedroe, Advisor Perspectives
