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

To study such an issue and its implications to fund investors, researchers at S&P Dow Jones Indices have expanded their original SPIVA (S&P Indices Versus Active) Scorecard series to focus on active managers of institutional-grade funds. Like its SPIVA sister research, the Institutional Scorecard compares active managers to each fund's respective S&P benchmark. These include institutional fund share classes as well as separately managed accounts and commingled trusts only available to institutional investors.

Using data from the most recent Institutional Scorecard, the pie charts below show how many of these managers failed to beat their respective S&P indexes in the past 10 years (through 2020). On a net-of-fees basis, 82.75% of all domestic institutional large-cap core equity active managers failed to beat the S&P 500. For all U.S. small-cap core funds, 76.72% lagged the respective S&P index. For international equity funds run by institutional managers, 75% underperformed their respective S&P index, 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 "underperformance among institutional equity accounts was not meaningfully different from that reported for (retail) mutual funds."

They also pointed out that increased "volatility in financial markets in 2020 provided ample opportunity for fund managers to show their stock-picking skills." This was a period in which a global coronavirus pandemic rattled markets. As a result, S&P's researchers note, active "growth managers in particular were well positioned to benefit from the accelerated lifestyle changes" taking place at the time.

The report found that "nonetheless, the majority of institutional accounts across all equity fund categories underperformed" over the 10-year period studied. 

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. Despite 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 unfulfilled promises. Along with a wealth of evidence by academic luminaries — including Eugene Fama, Kenneth French and Harry Markowitz, to name just a few — highlight the importance of sticking with a globally diversified and passively managed portfolio of index funds.


1.) S&P Dow Jones Indices, "SPIVA Institutional Scorecard," Sept. 14, 2021.

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