Swedroe: No Shockers From Midyear SPIVA

September 16, 2015

The midyear S&P Indices Versus Active (SPIVA) domestic scorecard provides another example of why (at least when it comes to the overall results of active management relative to appropriate benchmarks) the past is, in fact, prologue.

Let’s review some of the highlights from the June 2015 scorecard. The table below shows the percentage of active managers that were outperformed by their benchmarks over the one-year and 10-year periods ending June 30:


Asset Class One-Year Period Ending June 30, 2015 (%) 10-Year Period Ending June 30, 2015 (%)
Large Growth 44.3 89.7
Large Core 71.2 81.7
Large Value 69.8 61.1
Mid Growth 47.5 88.8
Mid Core 57.7 91.5
Mid Value 45.5 84.0
Small Growth 94.8 85.9
Small Core 70.3 83.2
Small Value 76.2 82.2
Real Estate 60.1 78.4
Developed International 34.4 82.5
Developed Small 50.7 56.5
Emerging Markets 73.3 92.2
Long-Term Government 98.8 93.3
Intermediate-Term Government 88.9 75.6
Short-Term Government 86.7 75.6
Long-Term Investment Grade 82.9 92.9
Intermediate-Term Investment Grade 79.6 52.6
Short-Term Investment Grade 83.5 57.4
High Yield 51.1 92.9
Mortgage-Backed Securities 58.7 77.6
Emerging Markets Debt 90.4 81.3

SPIVA Results

For the one-year period, of the 13 equity asset classes, a majority of active funds managed to outperform in only four. For the 10-year period, there was no asset class for which that was the case. In general, the percentage of active managers failing to outperform increased as the time horizon increased.

Also, note that in the supposedly inefficient asset classes of U.S. small, small growth and small value stocks, a large majority of active funds underperformed in both the one-year and 10-year periods. For the 10-year period, performance in what’s generally considered the most inefficient asset class—emerging markets—was even worse. Finally, while a majority of international large funds outperformed in the one-year period, a large majority of them failed to do so in the 10-year period.

Looking at the debt markets, we see even worse results. There was no case in which a majority of active funds outperformed. This was especially true in the case of emerging market debt; again, a supposedly inefficient asset class. More than 90 percent of the active funds in this asset class underperformed their benchmark for the one-year period, and more than 80 percent failed to outperform over the 10-year period.

Managers Vs. The Benchmark

The following table shows the return of the appropriate benchmark compared with the return of the average actively managed fund (equal weighted) in the same broad asset class (large, midcap, small and multi-asset class) for the latest 10-year period.


Benchmark Return For The 10-Year Period Ending June 30, 2015 (%) Return Of The Average Active Fund For The 10-Year Period Ending June 30, 2015 (%)
S&P 500 (Large) 7.9 7.0
S&P 400 (Mid) 9.8 8.5
S&P 600 (Small) 9.3 7.9
S&P 1500 (Multi-Asset Class) 8.1 7.0

Depending on the asset class, underperformance ranged from 0.9 percentage points to 1.4 percentage points. On an asset-weighted basis, the underperformance gap was extremely similar, although a bit smaller.

The data was again similar for international equity funds. The following table shows the benchmark return and the equal-weighted return of actively managed funds in the same broad asset class for the latest 10-year period.


Benchmark Return For The 10-Year Period Ending June 30, 2015 (%) Return Of The Average Active Fund For The 10-Year Period Ending June 30, 2015 (%)
International Large 6.1 5.2
International Small 7.5 7.9
Emerging Markets 9.1 7.2

While the average fund outperformed the benchmark in international small-caps by 0.4 percentage points, active funds underperformed in large-caps by a wider margin (0.9 percentage points) and also underperformed in emerging markets by a much larger 1.9 percentage points.

Another Angle

As was the case in domestic markets, equal-weighting actively managed funds somewhat improved the results, although it still left a small performance gap in international large-caps and a performance gap of 1.2 percentage points in emerging markets.

Also of interest was the wide performance gap in emerging market debt. On an equal-weighted basis, the average active fund underperformance gap was 2.0 percentage points, even greater than it was for equities. On an asset-weighted basis, the gap was still 1.8 percentage points. Those are shockingly high figures.

The semiannual SPIVA review also highlights the fact that a large percentage of active funds continue to end up in the mutual fund graveyard. Over the past five years, 23 percent of domestic funds and 17 percent of international fund “died.”

While the preceding data is compelling evidence for the failure of the active management industry to generate alpha, it’s important to note that all of the above figures are based on pre-tax returns. Given that the higher turnover of actively managed funds generally makes them less tax efficient (it’s often the case that for taxable investors, the largest expense of actively managed funds isn’t the expense ratio or trading costs, but taxes), on an after-tax basis, the failure rates would likely be much higher.

Although I always find the SPIVA scorecards of interest, there’s no longer any suspense in reading them. As Yogi Berra famously said, “It’s deja vu all over again.”


Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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