Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) scorecards, which compare the performance of actively managed equity mutual funds to their appropriate index benchmarks. The 2017 midyear scorecard includes 15 years of data.
Following are some of the highlights from the report:
- Over the five-year period, 82% of large-cap managers, 87% of midcap managers and 94% of small-cap managers lagged their respective benchmarks. Note that the performance of active managers was the worst in the very asset class they claim is the most inefficient.
- Over the 15-year investment horizon, 93% of large-cap managers, 94% of midcap managers, 94% of small-cap managers and 82% of REIT managers failed to outperform on a relative basis. Again, note the poor performance in small-caps, as just 6% of active funds outperformed their benchmark index.
- Over the 15-year horizon, on an equal-weighted (asset-weighted) basis, active large-cap managers underperformed by 1.5 percentage points (0.9 percentage points), active midcap managers underperformed by 1.9 percentage points (1.3 percentage points), active small-cap managers underperformed by 2.3 percentage points (1.6 percentage points) and active REIT managers underperformed by 0.8 percentage points (0.5 percentage points). Note that multicap managers, who have the supposed advantage of being able to move across asset classes, underperformed by 1.3 percentage points (0.4 percentage points). Again, the worst performance was in the supposedly inefficient small-cap space.
- Over the 3-, 5-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their respective benchmarks. Over the 15-year horizon, 85% of active global funds underperformed, 92% of international funds underperformed, 83% of international small-cap funds underperformed and, in the supposedly inefficient emerging markets, 95% of active funds underperformed.
- Over the 15-year horizon, on an equal-weighted (asset-weighted) basis, active global funds underperformed by 0.8 percentage points (0 percentage points), active international funds underperformed by 2.0 percentage points (0.6 percentage points) and active international small funds underperformed by 1.1 percentage points (0.3 percentage points). Emerging market funds produced the worst performance, underperforming by 2.5 percentage points (1.4 percentage points).
- Highlighting the importance of taking into account survivorship bias, over the 15-year period, more than 58% of domestic equity funds, 55% of international equity funds and approximately 47% of all fixed-income funds were merged or liquidated.
While I believe the preceding data is compelling evidence of the active management industry’s failure to generate alpha, it’s important to note that all the report’s figures are based on pretax returns.
Given that actively managed funds’ higher turnover generally makes them less tax efficient, on an after-tax basis, the failure rates would likely be much higher (taxes are often the highest expense for actively managed funds).