Better Money Return

SPIVA: 2018 Active vs. Passive Scorecard

Better Money Return

Last year marked a new milestone in passive investing. Assets held by active managers fell behind their index fund rivals in the biggest and most hotly contested part of the U.S. funds marketplace, large-cap equities.

By the end of 2018, some 92.09% of active large-cap core stock fund managers over the past 15 years had underperformed the S&P 500. In addition, this was the ninth straight year that a majority of actively run funds in such a congested U.S. funds marketplace had lost to their respective blue-chip index, according to the latest SPIVA research. (Large-cap growth managers did even worse over that period -- 94.59% trailed their respective S&P index through Dec. 31, 2018.)

Such a drubbing came as the S&P 500 was losing more than 4% on the year, once again dousing a popular fable of active managers that they provide extra protection for investors during periods of heightened market stress. 

The SPIVA (S&P Indices Versus Active) Scorecard tracks how professional fund managers are doing against their respective indexes. It's referred to as a "persistence" report since such research is designed to show how consistent returns are over time for stock and bond managers. Ironically, these research reports usually turn out uncovering just how inconsistent active management really is -- over both shorter- and longer-term periods of study. 

This is certainly the case with the 2018 Scorecard. Besides finding failing returns in large-cap equities, SPIVA reports that by 2018's completion 97.44% of all small-cap core funds trailed the S&P SmallCap 600 Index over the trailing 15 years. In terms of style, 98.17% of active small growth managers lagged their respective benchmark, while 93.51% of small value funds lost to their most similar S&P index.

In a down year for equities, SPIVA found that most active fixed-income managers still struggled against their benchmarks. In terms of long-term government fixed-income funds, 98% of active managers failed in 2018 to outgain their respective Barclays index over the past 15 years. For active intermediate-term government bond fund managers, 92% were laggards.

Below is a graphical summary of SPIVA's full-year 2018 results with updated longer-term numbers. Included are fresh data sets on two major considerations for IFA's advisors when reviewing results with clients -- survivorship bias and style drift. In both cases, performance data sets are scrubbed and comparisons obscured between active and passive funds. (See section below "Survivorship Bias and Style Consistency.")

Performance Comparisons

U.S. Equity

The table below shows the percentage of a selection of active domestic equity funds that underperformed their respective benchmarks over one-, three-, five-, 10- and 15-year periods ending Dec. 31, 2018.

Percentage of U.S. Equity Funds Outperformed by Benchmarks
15 Years (1/1/2004 - 12/31/2018)
Fund Category Comparison Index 1-Year (%) 3-Year (%) 5-Year (%) 10-Year (%) 15-Year (%)
Large-Cap Growth Funds  S&P 500 Growth  60.27
76.00
87.50
84.08
94.59
Large-Cap Core Funds  S&P 500  75.85
87.21
92.35
93.27
92.09
Large-Cap Value Funds  S&P 500 Value  46.27
70.91
79.08
81.71
79.33
Small-Cap Growth Funds  S&P SmallCap 600 Growth  61.45
76.32
88.17
85.65
98.17
Small-Cap Core Funds  S&P SmallCap 600  87.55
94.17
95.13
92.97
97.44
Small-Cap Value Funds  S&P SmallCap 600 Value  83.33
89.38
94.39
87.41
93.51
Real Estate Funds  S&P United States REIT  88.89
76.47
75.00
88.17
86.21
All Domestic Funds  S&P Composite 1500  68.83
81.49
88.13
84.49
88.97

 

The pie charts below show the percentage of active U.S. equity funds that underperformed their respective benchmarks for the 15-year period ending Dec. 31, 2018.

SPIVA-Active-vs-Benchmark-US

 

SPIVA-Active-vs-Benchmark-US-all

International Equity

The table below shows the percentage of active international equity funds that underperformed their respective benchmarks over one-, three-, five-, 10- and 15-year periods ending Dec. 31, 2018.

Percentage of International Equity Funds Outperformed by Benchmarks
15 Years (1/1/2004 - 12/31/2018)
Fund Category Comparison Index 1-Year (%) 3-Year (%) 5-Year (%) 10-Year (%) 15-Year (%)
International Funds  S&P International 700  76.84
89.19
81.78
81.07
89.83
International Small-Cap Funds  S&P Developed Ex-U.S. Small Cap  65.52
73.42
73.68
64.15
75.86
Emerging Markets Funds  S&P/IFCI Composite  78.10
89.27
92.67
87.72
96.15
Global Funds  S&P Global 1200  70.61
84.26
84.92
81.20
83.16

 

The pie charts below show the percentage of active international equity funds that underperformed their respective benchmarks for the 15-year period ending Dec. 31, 2018.

SPIVA-Active-vs-Benchmark-International

Fixed Income

The table below shows the percentage of a selection of fixed income funds that underperformed their respective benchmarks over one-, three-, five-, 10- and 15-year periods ending Dec. 31, 2018.

Percentage of Fixed Income Funds Outperformed by Benchmarks
15 Years (1/1/2004 - 12/31/2018)
Fund Category Comparison Index 1-Year (%) 3-Year (%) 5-Year (%) 10-Year (%) 15-Year (%)
Government Long-Term  Barclays US Government Long  16.98
100.00
96.61
94.94
98.04
Government Intermediate-Term Barclays US Government Intermediate  100.00
100.00
81.82
80.56
91.67
Government Short-Term Barclays US Government (1-3 Year)  86.96
81.48
79.31
67.65
82.86
Investment-Grade Long-Term Barclays US Government/Credit Long  9.09 93.48 98.91 80.31 98.41
Investment-Grade Intermediate-Term Barclays US Government/Credit Intermediate  90.82
40.00
51.63
49.38
76.63
Investment-Grade Short-Term Barclays US Government/Credit (1-3 Year)  92.55
45.45
54.84
43.75
70.21
High Yield Funds  Barclays US Corporate High Yield  75.60
96.63
96.52
96.63
99.15
Global Income  Barclays Global Aggregate  60.95
59.09
57.66
47.22
62.86

 

The pie charts below show the percentage of active bond funds that underperformed their respective benchmarks for the 15-year period ending Dec. 31, 2018.

SPIVA-Active-vs-Benchmark-FixedIncome

Survivorship Bias and Style Consistency

Style consistency is extremely important when making performance comparisons between a fund and a benchmark. If an active U.S. Large Cap manager is rotating between growth and value type stocks, then performance comparisons can be skewed. Moreover, because different types of stocks have been known to carry different risk properties (i.e. small-cap and value), style consistency, or style drift, is extremely important to an investor from an asset allocation standpoint.

Further, survivorship bias is an important consideration when making aggregate performance comparisons. Many funds end up being liquidated or merged over the course of their life and their historical performance is subsequently dropped from databases. This bias inflates the overall historical performance of active funds. From a practical standpoint, it is also important for investors to understand the risk associated with potentially finding themselves in a fund that ends up being liquidated, usually due to underperformance.

The pie charts below display the percentage of funds that survived over the 15-year period ending Dec. 31, 2018, across all major asset classes as well as the percentage that maintained a consistent style. We also included an average of the asset classes shown in the chart. As you can see, over the 15-year period only one-half of the funds across the major asset classes survived the whole period.

Notice that such a shell game appears to be getting worse -- 71% of actively managed domestic large-cap equity fund managers resorted to style drifting strategies in order to try to juice returns. Even more (73%) of stock pickers focused on international small caps shape shifted, notes SPIVA.

Survivorship-Major-Asset-Classes

As you can see below, a majority of the asset classes shown style drifted over the 15-year period. How are we supposed to properly benchmark a fund that style drifted with a benchmark that did not style drift? As we have often stated, the missing link in investment analysis is proper benchmarking. This style drift also poses significant risks to investors who are looking to maintain a consistent asset allocation based on their individual risk capacity.

Style-Drifts-Major-Asset-Classes

Taken as a whole, the SPIVA report remains one of IFA's favorite resources to objectively track how active managers are performing against their indexing rivals. As with past annual reports, this is another sobering check of active management's empty promises. Fortunately, more investors are evidently educating themselves about the benefits of passively run portfolios, voting with their feet by moving more of their money into index funds. (See IFA.TV's video about how to learn why it's so important to invest and relax.)