Swedroe: More Proof Active Falls Short

Like clockwork, each year the S&P Dow Jones Indices Versus Active (SPIVA) scorecards report actively managed funds’ persistent failure to outperform appropriate, risk-adjusted benchmarks. While the mid-year 2018 SPIVA report isn’t out yet, we can take a quick look at some other data, which shows that the first half of the year was no different.

For example, Morningstar data shows that through June 30, the Vanguard S&P 500 ETF (VOO) returned 2.7%, outperforming 71% of the actively managed funds in its Morningstar style box.

This poor performance came despite the fact that there was tremendous opportunity for active managers to add value given the huge dispersion of returns within the S&P 500 Index.

Best And Worst Performers

The following table, taken from an article published on Seeking Alpha, shows the performance of the top 50 stocks within the index in the first half of the year. While the index was up 2.7%, two stocks in it were up at least 100% (with the leading performer being ABIOMED Inc., which returned 118.3%), eight stocks were up at least 50%, 14 stocks were up at least 40%, 32 stocks were up at least 30%, and 50 stocks were up at least 22.9%.

As the following table, taken from a related Seeking Alpha article, shows, there were also five stocks in the index that lost at least 30%, 27 stocks that lost at least 20%, and 50 stocks that lost at least 15.9%.

Opportunities Abound

Again, this wide dispersion in returns certainly provided active managers tremendous opportunities to generate alpha. To add value, they didn’t even have to be smart enough to pick from among the index’s 50 best performing stocks; they just had to be smart enough to avoid the 50 dogs and they would have outperformed by a huge margin. Yet the vast majority failed to do so.

Even worse for the active management faithful was that in the supposedly inefficient asset class of small-cap stocks, Morningstar data shows the iShares Core S&P Small-Cap ETF (IJR) returned 9.4% on a NAV basis and outperformed 93% of the actively managed funds in its Morningstar style box.

Another dagger at the heart of active management was that, despite the supposedly really inefficient asset class of emerging markets being the worst performing asset class in the first half of 2018, with Morningstar data showing the iShares MSCI Emerging Markets ETF (EEM) lost 6.9% on a NAV basis, EEM still outperformed 55% of active funds in the category. All an active manager would have had to do to outperform was sit on some cash, which they typically do. Furthermore, negative markets are when active managers are supposed to be protecting you. But, here again, they failed.

When it comes to active management’s aggregate performance, the only thing that tends to be different each year is the excuse the active management community contrives for its failure. And each time, those explanations are exposed as lame excuses, without any rationale to support them. I’ll review active managers’ performance again at the end of the year in my annual article on lessons the markets have taught investors.

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