Collective Brain

Passive vs. Active — The Scorecard as of 6/30/2013

Disclaimer: This article contains information that was factual and accurate as of the original published date listed on the article. Investors may find some or all of the content of this article beneficial but should be aware that some or all of the information may no longer be accurate. The information and/or data in this article should be verified prior to relying on it when making investment decisions. If you have any questions regarding the information contained in this article please call IFA at 888-643-3133.

Collective Brain

At Index Fund Advisors, one of our favorite pieces of research is the semi-annual Standard and Poor’s Index Versus Active Funds (SPIVA®) Scorecard put out by S&P Dow Jones Indices as of June 30, 2013. The S&P Indices Versus Active (SPIVA®) measures the performance of actively managed funds against their relevant S&P index benchmarks. These scorecards compare fund managers’ results across the spectrum of S&P large-cap, mid-cap, small-cap and sector indices. The distinguishing characteristic of this report is that it is free of survivorship bias (the failure to include funds that died). The recently released report for mid-year 2013 is consistent with past releases in that it shows the overall dismal results for active management, as seen in the table below:


The myth that passive is only valid for large cap while active management adds value for small cap and mid cap is once again busted:


Once again, less than half (47.0%) of the 2,272 domestic equity funds survived the five-year period while remaining style consistent. For the international funds, this percentage was higher (74.1%), but that may be due to the lower number of classifications of foreign equities, allowing more room for style drift.

Since SPIVA has been around for a long time and past reports (through 6/30/2008) are archived on their Website, we decided to do a little digging to see how active has fared against passive through the years. As shown in the four bar charts below, in almost every five year period studied, passive beats active for the four major asset classes of domestic equities, foreign equities, real estate, and fixed income.





While some may dismiss SPIVA as irrelevant because they claim that although the majority of active funds lose to their benchmarks (and the percentage of losers increases with the length of the period studied), one simply has to pick an above average fund and he will fare better than an index fund. Fair enough. The only problem is that we are still waiting for someone to provide a methodology for identifying these above-average managers in advance. Sure, there are things that help--like a lower expense ratio, but as we pointed out in this article, although equity funds from the lowest quadrant of expense ratios were found to be twice as likely to beat their benchmarks as funds from the highest quadrant of expense ratios over the ten years ending 12/31/2012, they still left investors with only a one-in-five chance of picking a winner.

If you are currently on the manager picking treadmill and would like to learn about a better way to invest via index funds, please call us at 888-643-3133.


Disclosure ..................................................................
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. The fund returns used are net of fees, excluding loads.  All index returns are total returns. A benchmark index provides an investment vehicle against which fund performance can be measured. It is not possible to invest directly into an index. Passively managed index mutual funds are designed to track indexes minus the expenses of the fund. Statistically significant index data sets provide useful information for portfolio design and selection. Past performance is not a guarantee of future results.