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Finding Value In SPIVA Data

August 29, 2011
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The easy takeaway from 2011’s half-year SPIVA scorecard is passive management wins in the long run, while active management is compelling over shorter periods of time.

The less obvious takeaway is active management does have its advantages.

As an ETF analyst, it would be easy to piggyback on the volumes of research done by visionaries such as John Bogle and Burton Malkiel and conclude that the SPIVA scorecard is another feather in the cap of passive-management strategies. In fact, I’d love to. Unfortunately, my eye caught the performance of active value managers, and the contrast is striking.

Active managers running value strategies were the only managers who showed the ability to persistently outperform their benchmarks. They were able to do so across all asset classes and over all time frames.

Believe it or not, the preponderance of active managers who outperformed their benchmarks increased as the time frame of study increased. This is the exact opposite effect that we see in every other asset class and strategy in the scorecard.

Fund Category

Comparison Index

1 Year

3 Years

5 Years

All Domestic Equity Funds

S&P Composite 1500

48.99

55.16

58.27

All Large Cap Funds

S&P 500

60.47

63.96

61.28

Large Cap Value Funds

S&P 500 Value

45.4

44.13

35.32

Difference

15.07

19.83

25.96

All Mid Cap Funds

S&P MidCap 400

66.67

75.07

78.81

Mid Cap Value Funds

S&P MidCap 400 Value

56.63

63.27

66.67

Difference

10.04

11.8

12.14

All Small Cap Funds

S&P SmallCap 600

47.48

63.08

60.69

Small Cap Value Funds

S&P SmallCap 600 Value

39.64

52.29

47.67

Difference

7.84

10.79

13.02

All Multi Cap Funds

S&P Composite 1500

59.73

67.34

67.26

MultiCap Value Funds

S&P Composite 1500 Value

50.65

54.9

54.04

Difference

9.08

12.44

13.22

 

For active value managers, the rules that govern every other equity and fixed-income strategy fail to apply. The strategy literally defies gravity. Isaac Newton is spinning in his grave. John Bogle just passed out. What is the logic behind this stark contrast?

The answer lies in the mechanics of both the strategy and the indexes. Value investing is heavily dependent on proprietary analysis. One person’s value is another man’s trash. As such, what makes a company a value can change with one volatile-market day. A price/earnings ratio on the cusp of a threshold can become a growth company over the course of a week. For an active manager, this isn’t a problem because he or she can move in or out of the position at the exact moment the hypothetical company moves above or beyond his or her proprietary-ranking criteria. The nimbleness allows value investors to extract the maximum “value” from a company.

Meanwhile, the S&P value indexes in question rebalance quarterly. This means the index doesn’t have the flexibility to react to significant market moves in individual names that take them outside the value parameters.

One would think this would be most pronounced in a volatile market, as the magnitude of oscillations in share prices increase. While this may be true, the persistence of these effects is magnified over longer time frames.

In other words, while an active manager may get in and out of a value stock multiple times in a quarter, the passive index has probably held the company in question throughout the same period of time.

Ultimately, the “value” of active management exists. But it has to be found. Before we rush to universally condemn active managers, we should take a closer look at the numbers. Sometimes it is more than a coin flip, after all.

 

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