November 19, 2019
S&P Indices Versus Active (SPIVA) Scorecard
Download the Scorecard
Beginning in 2002, S&P Dow Jones Indices has published the annual S&P Indices Versus Active (SPIVA) scorecard, comparing the performance of “actively” managed equity and fixed income mutual funds to their respective benchmark indices. The 2019 report, which was released last week, compares the performance of actively managed funds to their passive indexes for the 3-, 5-, 10- and 15-year investment horizons.
We look forward to the SPIVA report each year as we believe it provides the most comprehensive and unbiased analysis of the global active vs. passive debate. As shown in the attached report, while some active managers print strong one-year performance numbers, those same managers often fall well short of their 3-, 5-, 10- and 15-year benchmarks.
For this reason, Wellspring remains committed to building and managing portfolios using low cost, tax-efficient, highly liquid index funds. The table below provides a summary of the data compiled in the SPIVA scorecard. It shows that for periods greater than one year, the majority of active managers, regardless of asset class or investment style, failed to keep pace with their respective passive benchmark indexes. As the title of the chart notes, active fund managers struggle to outperform over the long term.
Below are several of key of the takeaways from the 2019 SPIVA Scorecard:
Over the ten years ending June 2019, 88% of active large-cap managers, 85% of active midcap managers, and 88% of active small-cap managers underperformed their benchmark. Over the 15-year investment horizon, 90% of large-cap, midcap and small-cap managers and 83% of REIT managers trailed their benchmark. Similar to the ten-year performance, only 10% of active small-cap managers beat their benchmark index, despite the oft-cited claim of greater inefficiencies in small caps. (page 5)
Over the past 15-years, on an equal-weighted (asset-weighted) basis, "active" large-cap managers underperformed by 1.47 percentage points, midcap managers underperformed by 1.6 percentage points, small-cap managers underperformed by 2.1 percentage points and REIT managers underperformed by 1.02 percentage points. Multicap managers, who claim an ability to tilt portfolios in favor of the most attractive asset class, underperformed by 1.54 percentage points. Again, the largest underperformance was in the supposedly inefficient small-cap segment of the market. (Page 8)
Over the 3-, 5-, 10- and 15-year investment horizons ending June 30, 2019, active international equity managers also lagged the performance of their respective benchmarks. Over 15-years, 81.9% of "actively" managed global funds underperformed, 90.2% of international funds underperformed, 73.3% of international small-cap funds underperformed, and in the oft-cited inefficient emerging markets, 94% of active funds underperformed. (page 12)
Survivorship bias is detailed on pages 7 and 13 of the report. Over the past 15 years, a surprising 55% of all "active" domestic equity funds, 53% of international equity funds, and 56% of investment-grade intermediate fixed-income funds were merged or liquidated.
While we believe the SPIVA Scorecard provides compelling evidence for passive investing, it's also important to note that the performance numbers cited in the report are pretax and do not consider trading and turnover. Because annual turnover in "actively" managed funds typically average from a low of 20% to well over 100%, failure rates are generally higher than those detailed by Standard & Poor’s. Our analysis of annual performance data confirms that taxes are consistently the highest expense incurred for "actively" managed funds. Wellspring considers the impact of taxes on future returns before every rebalance and will only execute a trade if and when the projected after-tax return of a trade exceeds the pretax return of continuing to hold the position.
The performance of actively managed funds in fixed-income funds was equally challenged. The following results are for the 15 years ending June 30, 2019:
Within domestic bond funds, 73% of active intermediate investment-grade managers and 68% of active short-term bond managers underperformed their benchmarks. On an equal-weighted basis, their underperformance was 0.39 percentage points and 0.52 percentage points, respectively. However, on an asset-weighted basis, the investment-grade intermediate fund category outperformed its benchmark by 0.41 percentage points annually. We believe the outperformance in the intermediate-term asset class can be explained by "active" managers holding longer duration securities (i.e., taking more interest-rate risk) than their benchmarks.
For active municipal bond funds, 87% underperformed their respective benchmarks over 15 years. On an equal-weighted (asset-weighted) basis, the underperformance was 0.59 percentage points.
The Standard & Poor’s, Dow Jones SPIVA scorecard, provides strong support for the efficacy of passive over active investing. In addition to cost savings, increased tax efficiencies, lower turnover and trading costs, and ease of implementation, passive index funds outperform most actively managed funds over time. As Greenwich Associates founder and performance expert Charles Ellis noted, while it's possible to invest in an active manager who'll beat an index over one or three year period, the odds of doing so over longer time frames are so weak that it's not prudent to try, which is why Mr. Ellis refers to active investing as "the loser's game." And it's why we continue to see a persistent flow of assets out of actively managed funds and into passive strategies.