Despite Brief Reprieve, Active Funds Fail to Dent Indexing's Lead

Despite Brief Reprieve, Active Funds Fail to Dent Indexing's Lead

Despite Brief Reprieve, Active Funds Fail to Dent Indexing's Lead

If you're a long-term oriented investor, which we hope you are, then the latest SPIVA report should be worth at least a glance.  

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 dependable -- or, undependable -- returns are over time for stock and bond jockeys.  

As you might expect, the lastest updated research doesn't have much in the way of good news for proponents of active management. In the freshest scorecard data available, slightly more than 63% of all large-cap stock funds in 2017 underperformed the S&P 500 index. That wasn't the worst performance, though. Almost three-quarters of small-cap value active funds (74.07%) lagged a comparative benchmark in that same period. 

But after stocks (as represented by the S&P 500) gained 21.83% in 2017, growth-focused funds across market-cap sizes fared better last year against their indexes, according to SPIVA. For example, just 32.92% of large-cap growth managers in calendar 2017 lagged their respective benchmarks. Meanwhile, only 15.08% of small-cap growth funds were listed as failing to outperform their benchmarks over that one-year period. 

But let's get real. Just a year earlier, growth managers across-the-board were roundly whipped. Case in point: In 2016, SPIVA results show that nearly 90% of large growth funds failed to post better results than their respective S&P index. In that same period, almost 96% of small-cap growth managers lost to a representative sub-asset class benchmark.   

Taking a step back, a big picture view of SPIVA research reveals that even after last year's brief reprieve, active fund managers still couldn't dent passive management's superior returns over longer timeframes. The data found that across domestic active funds on the whole, managers with market-beating mandates generated returns that trailed comparative indexes during the course of three-, five-, 10- and 15-years worth of data crunching. 

A similar pattern persists with seemingly staid bond funds. That might be rather ironic considering that fixed-income, broadly speaking, is one part of the market where many active managers claim -- apparently without merit -- an ability to uncover "mispricing" opportunities. (See  IFA.TV’s video about how free-markets establish fair value pricing: “The Random Walk of Market Returns.”)

In any case, we urge you to at least take a glance at the following breakdown of the latest key SPIVA "persistence" scorecard results. We've replicated the S&P data in graphically pleasing terms. In addition, for those seeking a greater degree of analysis, included below is an IFA explanation of this report's findings related to style drift and survivorship trends -- both of which are common data-massaging techniques used to hide active managers' real performance against their passive rivals.

Hopefully, the following data will stimulate more ideas and insights about your investment portfolios. (Hint: These are the types of questions IFA's advisors LOVE to mull over with all types of investors each and every day.)

 

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, 2017.

Percentage of U.S. Equity Funds Outperformed by Benchmarks

Fund Category Comparison Index 1-Year (%) 3-Year (%) 5-Year (%) 10-Year (%) 15-Year (%)
Large-Cap Growth Funds  S&P 500 Growth  32.92 67.58 80.92 93.65 93.49
Large-Cap Core Funds  S&P 500  68.98 88.45 90.99 94.95 94.67
Large-Cap Value Funds  S&P 500 Value  46.88 80.37 85.07 70.44 85.71
Small-Cap Growth Funds  S&P SmallCap 600 Growth  15.08 86.53 86.67 95.56 98.73
Small-Cap Core Funds  S&P SmallCap 600  58.59 93.78 95.59 96.23 96.55
Small-Cap Value Funds  S&P SmallCap 600 Value  74.07 82.14 95.45 92.78 89.47
Real Estate Funds  S&P United States REIT  36.9 59.76 73.68 84.54 81.13
All Domestic Funds  S&P Composite 1500  63.43 83.4 86.72 86.65 83.74

Scroll right to see more periods

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, 2017.

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, 2017.

Percentage of International Equity Funds Outperformed by Benchmarks

Fund Category Comparison Index 1-Year (%) 3-Year (%) 5-Year (%) 10-Year (%) 15-Year (%)
International Funds  S&P International 700  53.95 69.4 70.93 81.68 91.63
International Small-Cap Funds  S&P Developed Ex-U.S. Small Cap  44.05 65.75 65.52 72.55 78.13
Emerging Markets Funds  S&P/IFCI Composite  64.89 78.92 77.78 85.14 94.83
Global Funds  S&P Global 1200  50.21 77.45 77.71 81.98 82.47

Scroll right to see more periods

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, 2017.

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, 2017.

Percentage of Fixed Income Funds Outperformed by Benchmarks

Fund Category Comparison Index 1-Year (%) 3-Year (%) 5-Year (%) 10-Year (%) 15-Year (%)
Government Long-Term  Barclays US Government Long  96.43 100.00 98.31 95.24 98.00
Government Intermediate-Term Barclays US Government Intermediate  57.89 90.91 80.00 78.05 90.48
Government Short-Term Barclays US Government (1-3 Year)  47.83 69.23 79.31 76.47 88.24
Investment-Grade Long-Term Barclays US Government/Credit Long  96.74 94.68 95.45 95.4 97.73
Investment-Grade Intermediate-Term Barclays US Government/Credit Intermediate  31.37 35.53 40.94 51.06 73.53
Investment-Grade Short-Term Barclays US Government/Credit (1-3 Year)  22.22 41.67 43.33 57.81 68.89
High Yield Funds  Barclays US Corporate High Yield  80.95 90.87 93.81 98.37 98.23
Global Income  Barclays Global Aggregate  64.86 60.55 52.59 58.33 69.44

Scroll right to see more periods

The pie charts below show the percentage of active bond funds that underperformed their respective benchmarks for the 15-year period ending Dec. 31, 2017.

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, 2017, 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.

Survivorship-Major-Asset-Classes

 

As you can see below an average of 57% 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