Swedroe: Active Funds Whiff Again

March 11, 2016

Fixed Income

  • Active bond funds didn’t perform any better. For example, over the 10-year period, 95.6% of active long-term government bond fund managers underperformed (doing so on an equal-weighted basis by 2.9 percentage points), 77.1% of active intermediate-term government bond fund managers underperformed (doing so on an equal-weighted basis by 0.3 percentage points), 77.1% of active short-term government bond fund managers underperformed (doing so on an equal-weighted basis by 0.3 percentage points) and 81.3% of active mortgage bond fund managers underperformed (doing so on an equal-weighted basis by 0.7 percentage points).
  • While the high-yield bond market is often considered to be best accessed via active investing, the 10-year results show that more than 90% of actively managed high-yield bond funds underperformed their broad-based benchmark. On an equal-weighted basis, the underperformance was 1.4 percentage points (7.0% versus 5.6%).
  • Funds continue to disappear at an alarming rate. For example, over the past 10-year period, 40% of domestic and global equity funds, and 37% of international developed market equity funds, were merged or liquidated—highlighting the importance of addressing survivorship bias in mutual fund analysis.

Conclusion

While the above data is compelling evidence on the failure of the active management industry to generate alpha, it’s important to note that all of the above figures are based on pretax returns. Given that the higher turnover of actively managed funds 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).

The SPIVA scorecards certainly do provide us with valuable information, but there is 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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