The latest SPIVA scorecard is pretty depressing news for active managers.
One of my favorite scenes in any movie ever is when Navin Johnson, the lead character from Steve Martin’s unheralded classic ,“The Jerk,” jumps up and down with excitement, declaring, “The new phonebooks are here! The new phonebooks are here!”
I’ve been accused of acting the same way twice a year when S&P Dow Jones Indices releases the S&P Index Versus Active report, shorthanded with the somewhat unfortunately moist acronym “SPIVA.”
As far as I know, SPIVA is the longest-standing most rigorous survey of investment management performance. It does significant things to make sure it’s fair, like survivorship bias correction, measuring style consistency and cleaning out all of the garbage data (and believe me, if you do any work with large financial data sets, they’re always full of junk).
The end result is a semiannual snapshot of how active mutual fund managers are doing versus common benchmarks like the S&P 500 and the Barclays Aggregate. Having read the thing for years, here’s what I generally expect: In most categories, maybe 55 to 60 percent of active managers underperform. In one or two categories, active managers reverse that and have more than the coin flip in their favor.
This time, the numbers are really pretty depressing for fans of active management. Here are my favorite highlights from the first six months of the year, but you can grab the full report at the SPIVA website:
This line pretty much sums it up:
Measuring 2,804 equity mutual funds chasing U.S. stocks, 60 percent of them failed to beat a simple benchmark. Over the three-year period, 85 percent failed to beat a simple benchmark.
Remember, this is raw performance, not even adjusted for risk. Think about that for a minute.
If I know one thing about analyzing performance returns, it’s that, in general, most active managers take more risk than a neutral benchmark. It’s extraordinarily rare that I’ve ever run a series on an active equity fund and found that it’s got a lower beta than the appropriate benchmark—meaning that not only did most funds fail to do what they were promising, they likely took more risk in doing it. They certainly charged more than the handful of basis points the largest U.S. equity ETFs took.
The data actually gets worse. S&P, trying to be as fair as possible, also looks at a ton of individual segments within U.S. equity. So surely there must be some place where stock picking worked last year, right? I mean, aren’t we always told that the value of analysts is finding, say, small, unknown companies before the next guy?