Evolution

S&P Releases Active vs. Passive Scorecard for 2002

Evolution

Standard & Poor's disclosed the second installment of its running quarterly scorecard that tracks the number of actively-managed mutual funds that best relevant S&P benchmarks. Since the data has been updated as of the end of the fourth quarter of 2002, a look at the results of last year's active vs. passive battle is now possible.

For the period 2000-2002, only a majority of large-cap value funds were able to beat the relevant index, although large-cap growth funds won by a whisker.

More highlights from the active vs. passive matchup:

  • The S&P 500, S&P MidCap 400, and S&P SmallCap 600 indices outperformed 54% of large-cap funds, 77% of mid-cap funds, and 72% of small-cap funds, respectively, during 2000-2002, the worst three-year bear market since 1941.
  • In 2002 alone, the S&P 500, S&P MidCap 400 and S&P SmallCap 600 outperformed 61% of large-cap funds, 70% of mid-cap funds, and 74% of small-cap funds, respectively.
  • The S&P MidCap 400 and S&P SmallCap 600 outperformed mid-cap and small-cap funds, respectively, for the third year in a row in 2002.

Going . . . going . . . gone . . .

The bear market of the last three years has taken its toll on the ranks of mutual funds, with 14% of active funds liquidated or merged, according to S&P. In 2002 alone, 6.6% of funds bit the dust, and 11% of active funds changed their names (these figures are for domestic funds only and don't include sector funds).

"If you don't correct for survivorship bias, three year results for large, mid and small cap funds would be biased upwards by 8.6%, 2.8%, and 4.9% respectively," said David Blitzer, managing director and chairman of the index committee at S&P. "It is therefore increasingly important for fund analysis to account for this bias in order to provide more accurate comparisons against the index benchmarks."

The S&P fund scorecard measures over 2,000 actively-managed mutual funds. S&P will publish the scorecard on a quarterly basis; the first edition was released in November of 2002.

S&P also keeps track of asset-weighted returns for each fund group, aside from the equal-weighted returns shown in the table above. Asset-weighted returns may paint a clearer picture of the investor experience because large funds figure more prominently in the results than smaller funds. Using equal-weighted returns, a $10 billion fund is treated the same as a $10 million fund.

Interestingly, for the three- and five-year periods ending December 2002, asset-weighted returns were worse than equal-weighted returns for large-, mid-, and small-cap funds. This jibes with the theory that nimble funds with small asset bases perform better than bloated funds.

01/22/2003

* Click here for a PDF of the S&P study