Swedroe: Active Even Fails Institutions

August 11, 2017

Vanguard founder John Bogle’s “cost matters hypothesis” explains why, after subtracting fees, returns from active management tend to be smaller than returns from passive management, as the latter costs less. However, retail investors tend to pay higher advisory and management fees than institutional investors.

Since 2002, S&P Dow Jones Indices has been publishing its S&P Indices Versus Active (SPIVA) U.S. Scorecard. The scorecard measures the performance of actively managed equity funds investing in domestic and international stocks, as well as active fixed-income funds, against their respective benchmarks.

SPIVA Weighs In

For the first time, the 2016 SPIVA Institutional Scorecard examined the impact of fees on the performance of mutual funds and institutional managed accounts against their appropriate benchmarks. The report, which analyzes actively managed funds across equity and fixed-income categories using gross- and net-of-fees returns, covered the 10-year period ending in 2016.

Following is a summary of its key findings:

  • While institutional funds produced better results than mutual funds did, across all asset classes within the domestic equity space, the overwhelming majority of active managers—both retail and institutional—lagged their respective benchmarks. On a net-of-fee basis, the percentage of institutional funds underperforming their benchmark ranged from 63% (large value) to 96% (small growth). The degree of underperformance among small growth funds creates a problem for those who claim the market in small stocks is inefficient and thus ripe for active managers. For mutual funds, the percentage of active funds that underperformed ranged from 64% (large value) to 98% (midcap and small growth).
  • 81% of actively managed international institutional funds failed to provide value after accounting for fees. And 84% of active mutual funds failed to do so. Performance was somewhat better in international small stocks, where “only” about two-thirds of institutional and mutual fund managers underperformed.
  • 79% of active institutional managers investing in emerging market equities, which traditionally has been thought to be one area where active management can add value, fell short of the benchmark after fees. Mutual funds fared even worse, with 86% underperforming.
  • The results in bond markets were not encouraging. In the 13 bond categories examined, the percentage of mutual funds that underperformed ranged from 59% (investment-grade bonds) to as high as 97% (high-yield bonds). The results were similar for institutional managers, though in one category a small majority of active funds outperformed. That occurred in investment-grade bonds, where only 48% of active institutional funds underperformed. This could be explained by active funds having taken more credit or duration risk than the benchmark. On the other hand, 100% of high-yield institutional managers underperformed, and in the supposedly inefficient asset class of emerging market bonds, 75% underperformed.


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