Institutional-Grade Active Managers Don't Do Any Better: SPIVA


In theory, investing through an established wealth management firm can provide clients with access to institutional-grade mutual funds. These upper-tier share classes are often similar in holdings as their mom-and-pop cousins, but come with higher dollar thresholds in terms of minimum investments -- typically around $1 million or more.

By design, investors are rewarded with lower fund management fees through greater economies-of-scale of doing business with other big institutional clients. At IFA, our portfolio managers try to maximize such pooling of individual client assets into index funds offering institutional share classes.

A question, however, might arise whether passive investing loses any luster when active managers take advantage of institutional-grade equity mutual funds. 

In short, the answer is a resounding "No!" At least that's what researchers at S&P Dow Jones Indices found in their SPIVA Institutional Scorecard covering a 10-year period through 2018. 

Like its sister research series, the S&P Indices Versus Active (SPIVA) compares active managers to each fund's respective S&P benchmark. In this iteration, analysts focus on institutional funds. These include not only higher-grade share classes offered by U.S.-based fund companies, but also institutional separately managed accounts and commingled trusts.

The pie charts below using data provided in S&P's report show how many institutional managers failed to beat their respective S&P indexes. Due to a limited amount of discernible track records for active managers, the period reviewed was limited to the 10 years through 2018. (This is a shorter timeframe than other SPIVA scorecards focused on "retail" funds typically use.) 

Nonetheless, S&P's findings are eerily similar to such comparisons to the greater universe of non-institutional funds. On a net-of-fees basis, 76.17% of all domestic institutional equity active managers failed to overcome their respective S&P index. In terms of all mid-cap funds, 80.71% flunked such a comparison while 77.06% of all active small-cap funds underperformed. For emerging markets equity funds, such a losing rate was 75%, according to the study.

Below is a second data set presented in this SPIVA Institutional Scorecard analyzing non-institutional grade mutual funds based on figures from the Center for Research in Security Prices (CRSP).

Interestingly, the general pattern of underperformance by active managers in share classes that don't offer lower fee structures still shows up in convincing fashion. This leads S&P analysts to conclude that "the majority of active U.S. equity mutual funds underperformed their benchmarks over the 10-year period, even before accounting for fees."

They added: "This underperformance included those areas that are perceived to be more suited to active management, such as emerging markets and international small caps."

It's also important to note that since institutional funds are a smaller marketplace, S&P researchers were forced to rely in large part on information supplied directly by active fund managers themselves.

Given a need to use "self-reported" data, the authors of this institutional SPIVA scorecard point out that more active funds provided results on a "gross" fees basis than a "net-of-fees" standard. That's an important distinction and brings up another way that active management can blur these types of benchmarking efforts.

To their credit, S&P analysts do break down figures for both types of fee structures. They also take into account "survivorship bias" when correlating data. This is a common industry practice where funds are merged or closed, thereby scrubbing lagging active performance metrics from the view of less observant researchers. 

As a result, below is a table included in the institutional SPIVA report that includes columns with the number of funds at the start of this period reviewed on a gross- and net-of-fees basis. Depsite greater numbers for institutional funds reported on a more aggregate basis, such "gross" and "self-reported" accounts still show a majority of active managers unable to beat their closest-fit S&P benchmarks. 

As with past annual SPIVA reports, this institutional version1 is another sobering check of active management's empty promises. Fortunately, more investors are 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.) 


1.) Source: S&P Dow Jones Indices, "SPIVA Institutional Scorecard: How Much Do Fees Affect the Active versus Passive Debate?" (June 2019).  

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