SPIVA’s Soe: A Factor-Focused Future
Time and time again, the S&P Indices Versus Active (SPIVA) report has shown that active management more often than not underperforms index investing. Alpha, the SPIVA data make clear, is a very elusive thing. In fact, what a lot of people consider to be alpha often amounts to nothing more than some form of beta, says Aye Soe, author of the SPIVA report, and director of research and design for S&P Dow Jones Indices.
In a recent interview with IndexUniverse’s Cinthia Murphy, Soe discussed the future of the SPIVA data series, particularly the need to figure out ways to integrate the growing variety of factors—such as momentum—into S&P’s widely watched analysis of the active versus passive debate.
IndexUniverse.com: Is there such a thing as alpha, or is alpha just well-timed beta?
Aye Soe: There’s such a thing as alpha. But it’s very elusive and hard to capture. There are some managers that are able to provide that alpha, but when you break down what everybody commonly thinks of as alpha, most of the time, it’s actually beta.
But it’s beta captured in a different way—it could be quality, it could be volatility, value, small-size premium, or what have you. When you break that down, most of alpha really is beta, but there is that elusive alpha, the one that a few active managers are able to provide.
IU.com: When it comes to the SPIVA Report, one of the criticisms we hear is that the analysis doesn’t integrate value, momentum, all of these factors we're talking about. Do you think SPIVA will eventually look into that?
Soe: When we started SPIVA, we just wanted to take a look at how most average investors think about allocation—they look at market-cap ranges, and within those market-cap ranges, they look at the nine style boxes. We wanted to capture that.
In fixed income, they think about long-term, aggregate, municipal, etc., and the same thing with international funds—developed ex-U.S. and emerging markets. That’s how most people look at their asset allocation. That’s how we started SPIVA, and that’s how we built our framework and the comparisons.
But SPIVA will evolve. We may not incorporate all these factors into our ongoing report, but we may have one-time reports we might put out. I have a lot of plans to enhance SPIVA with one-time research reports. For example, there’s a lot of talk about dispersion. Dispersion measures the return or alpha opportunities for an active manager.
So, how does dispersion go with the managers’ outperformance? Are they able to realize that or not? So there are a lot of fascinating topics around SPIVA that I intend to enhance going forward.
IU.com: Historically, SPIVA shows that only about a third of active managers outperform their benchmarks at any point, and there’s no persistence of outperformance. Why do you think the debate between active versus passive continues to rage on when the data speak so poorly of active management?
Soe: I think the debate is healthy, and should continue to go on because active managers' premise is that they can capture and deliver returns above and beyond the benchmark, or provide investors with specific outcomes they are looking for.
The SPIVA report counters that premise. I think there should be a scorecard that looks at how these active managers are performing, but the debate is healthy.
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