The first half of 2020 was marked by waves of volatility across global stock markets. After reaching all-time highs in mid-February, the S&P 500 index suddenly reversed course to lose more than 34% by late March. The next month saw the U.S. large-cap benchmark produce its best monthly return in 33 years and set new records. Such a dramatic rebound lifted blue chip stocks through May and June.
The culprit in each swing was a worldwide pandemic caused by the coronavirus, or Covid-19. While economic activity dramatically slowed at the outset, a $2 trillion-plus government stimulus program and gradual reopenings of businesses across the country fueled a growing recovery as 2020's second quarter came to a close.
As a result, if you were a patient buy-and-hold investor, this year's second quarter probably didn't look too shabby. Millions of active traders, though, bailed on stocks and wound up whipsawed by the market's sudden turns.
Lagging performances by active fund managers aren't a new story. As we've been chronicling for decades, leading market researchers know better than to listen to boasts about peer-beating results. Instead, they hold stock jockeys to a higher standard -- namely, how they've done against their respective benchmarks.
Along these lines, S&P Dow Jones Indices has published its latest installment of the SPIVA (S&P Indices Versus Active) Scorecard. This new study compared active fund managers against their benchmarks through mid-year 2020, tracking performance in different asset classes during the past 15 years.
The overarching takeaway here remains the same. In good times as well as bad, active management has persisted to produce underwhelming results. Through June, more than 87% (87.2%) of all domestic stock fund managers had underperformed the broad S&P Composite 1500 Index since June 2005.
The pie charts below provide a more detailed picture of SPIVA results that take into account 2020's virus-impacted volatility in the year's opening six months.
Performance Comparisons
U.S. Equity
The pie charts below show the percentage of active U.S. equity funds that underperformed their respective benchmarks for the 15-year period ended June 30, 2020.
International Equity
The pie charts below show the percentage of active international equity funds that underperformed respective benchmarks for the 15-year period ended June 30, 2020.
Fixed-Income
The pie charts below show the percentage of active bond funds that underperformed respective benchmarks for the 15-year period ended June 30, 2020.
This study's findings highlight that even during extreme bouts of market volatility, active management simply hasn't delivered on its claims of outperformance. This is a bit ironic considering that fund managers typically justify their higher management and transactional costs with claims of protecting wealth during times of severe market stress. As one S&P analyst observed in a recent SPIVA study:
"Active managers sometimes seek to soften the conclusions of our regular SPIVA reports by arguing that, while index funds may have the advantage in rising markets, it's in volatile downturns that active management can prove its worth. Historical data argue otherwise, and most active managers continued to underperform in 2020."
Another red flag pointed out by SPIVA in its research is the elimination of a major loop hole used by active management in reporting performance numbers. In such instances, managers will merge or shutter a fund, moving investors into better performers. Past returns are thereby scrubbed to reflect an improved investment experience, creating what's known as a pronounced "survivorship bias" in longer-term data.
Not allowing such a shell game to take place is one of the reasons why IFA's investment committee finds these SPIVA studies so illuminating. In the most recent scorecard, S&P's researchers noted "SPIVA's accounting for survivorship bias continues to be a valuable cautionary tale." They added: "Fund liquidation nuymbers across segments regularly reached into the 60% range over a 15-year horizon."
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About the Author
Murray Coleman - Investment Writer - Index Fund Advisors
Murray is an investment writer at Index Fund Advisors. Prior to joining IFA, he worked as a funds reporter for The Wall Street Journal, The Financial Times, Barron's and MarketWatch.