Swedroe: Deconstructing Invesco’s Performance

The February 9 edition of Barron’s contained its annual listing of “best fund families” for the past one, five and 10 calendar years. Of all the fund families on the list, Invesco was the only one that managed to make the top four in each of the periods. In fact, it was the only fund family ranked in the top 10 of all three categories.

Vanguard came closest to matching that last impressive distinction. It ranked first in the one-year period, 11th in the five-year period and 10th in the 10-year period. In contrast, Invesco ranked third in the one-year and three-year periods, and fourth in the 10-year period. The firm’s remarkable results make it a prime candidate for my series examining the performance of actively managed fund families in comparison to a well-managed passive alternative.

Invesco Vs. DFA

As is my practice, we will evaluate the performance of Invesco equity funds that have both a 15-year track record and a comparable fund from Dimensional Fund Advisors (DFA). (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.) This allows us to compare returns to live funds with real-world costs.

There are, however, some Invesco equity funds that do have a 15-year track record, but no comparable fund from DFA. To ensure that our list is as comprehensive as possible, we’ll compare these Invesco funds to their appropriate benchmark index (when one is available).

When weighing the evidence, there are a few important things to keep in mind. First, we will be comparing funds to an index rather than to an index fund. Recall that indexes don’t have costs. Index funds do. Thus, if an Invesco fund were to match the performance of its benchmark index, we should consider that outperformance.

Second, the Morningstar data we’ll use unfortunately contains survivorship bias. Thus, it’s possible there were Invesco funds that, because they had performed poorly in the past, were either merged into better-performing funds or closed. If this is the case, the data below will overstate returns earned by Invesco’s investors.

Third, and most importantly, we can only know in the present (today) that Invesco would produce results to make them look so favorable in the Barron’s rankings. In other words, there’s hindsight bias at work.

15-Year Results

The tables below represent data covering the 15-year period from April 2000 through March 2015. We’ll use the cheapest fund class available in each instance. Where Invesco has more than one fund in an asset class, we’ll use their average when building portfolios using funds from each family.

Four of the nine Invesco funds produced higher returns than the comparable fund from DFA, and just two Invesco funds posted higher Sharpe ratios. An equal-weighted portfolio of Invesco funds from each asset class (again, equal-weighting the three Invesco U.S. large value funds and taking their average) produced an annualized return of 6.9 percent, underperforming the DFA portfolio by 0.8 percentage points a year. In addition, the Invesco portfolio produced a Sharpe ratio of 0.30 percent. That’s versus 0.32 percent for the DFA portfolio.

It’s also interesting to note that Invesco’s 0.8 percentage point underperformance was more than fully explained by its higher average expense ratio, which was 1 percentage point greater than DFA’s. In other words, Invesco’s underperformance wasn’t due to poor stock selection or bad market timing, but was caused by high expenses.

More Results

We’ll now look at another six of Invesco’s funds and compare their performance to appropriate benchmark indexes.

Of the six Invesco funds, just two managed to outperform their appropriate benchmarks. An equal-weighted portfolio of Invesco funds would have returned 4.7 percent, underperforming the benchmark portfolio by 1.1 percentage points a year. That gap in performance is greater than can be explained by the expenses of funds that would replicate the indexes.

The Invesco portfolio produced a Sharpe ratio of 0.24, versus 0.27 percent for the benchmark index portfolio. Once again, we see that Invesco’s underperformance was more than fully explained by the higher average expense ratio of its funds.

In light of the very high expenses charged by Invesco funds, and the poor performance caused by those high expense ratios, I found it particularly interesting that the first statement on the portion of the firm’s website describing their approach is: “We Put Investors First.” The results say otherwise. Clearly, Invesco is putting the interests of its shareholders first.

No Evidence Of Alpha

The bottom line is that there’s no evidence of Invesco’s ability to produce alpha (returns above an appropriate risk-adjusted benchmark). This is true whether we looked at large or small, value or growth, or domestic or international stocks. It’s especially critical to keep in mind that Barron’s ranked Invesco fourth among all mutual funds over the final 10 years of the period we examined. If the firm’s funds performed so poorly relative to appropriate benchmarks, it’s likely that the fund families ranked below Invesco performed much worse.

The evidence I have presented in this article is particularly compelling in light of a recent research report from Invesco, titled “Think Active Can’t Outperform? Think Again.”

The firm’s research team examined the evidence on high active share funds and claims that they outperform. One difficulty with this claim, however, is that there are many problems with active share itself. I discussed the research on active share in a recent article, “Dissecting The Active Share Myth.”

But there’s yet another problem for Invesco. Its high active share funds didn’t generate alpha.

Yes, it’s possible to outperform an appropriate risk-adjusted benchmark. However, the odds of doing so are so poor that it’s simply not prudent to even try. And as poor as the odds are for any one actively managed fund to outperform, the odds of a portfolio of actively managed funds outperforming are dramatically lower. That’s why author Charles Ellis called active investing a loser’s game.

Making matters worse is that, as described in my new book, “The Incredible Shrinking Alpha,” co-authored with Andrew Berkin, there are trends making the quest for alpha an ever-more-frustrating endeavor.

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