The Markets March 16, 2018

Active Fund Manager Performance History Doesn’t Tell Whole Picture

The SPIVA Scorecard of active fund managers produced by S&P Dow Jones Indices shows long-term underperformance of active managers, but Steve Deschenes, with Capital Group, takes issue with the active versus passive debate.

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During 2017, the percentage of active managers outperforming their respective benchmarks noticeably increased in categories like mid-cap growth and small-cap growth funds, according to the SPIVA Scorecard of active fund managers produced by S&P Dow Jones Indices.

However, while results over the short-term were favorable, the majority of active equity funds underperformed over the longer-term investment horizon. Over the five-year period, 84.23% of large-cap managers, 85.06% of mid-cap managers and 91.17% of small-cap managers lagged their respective benchmarks. Similarly, over the 15-year investment horizon, 92.33% of large-cap managers, 94.815 of mid-cap managers and 95.73% of small-cap managers failed to outperform on a relative basis.

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Over the 12-month period ending December 31, 2017, growth managers across all three market cap ranges fared better than their core and value counterparts. S&P Dow Jones Indices suggests these results highlight the cyclicality of style box investing, as core managers outperformed 12 months prior, with the exception of small caps, while value managers outperformed core and growth 18 months prior.

Across nine style categories, large-cap value was the best-performing category over the 10- and 15-year horizons, with 29.56% and 14.29% of managers, respectively, outperforming the S&P 500 Value benchmark.

International and emerging market equity indices began a strong rally in 2016 that continued in 2017, according to the scorecard. However, during the one-year period, with the exception of actively managed international small-cap equity funds, the majority of managers investing in global, international and emerging market funds underperformed their respective benchmarks.

Steve Deschenes, product management and analytics director at Capital Group, believes the SPIVA Scorecard does a disservice to investors. He says many active funds do underperform and/or charge high costs, but investors don’t need thousands of funds to build a bigger nest egg, just a few good ones.

“Contrary to how index proponents measure success, real investors don’t start investing on January 1 and stop investing on December 31. People invest for the long-term through bull and bear markets, and performance over decades is what matters if you’re saving for retirement,” he says. “The active-passive debate is an industry discussion which distracts investors from what can have a real impact on their portfolios. This has particular resonance right now when investors might be looking to do better during market downturns. The questions investors should really be asking are: Are my funds average or exceptional? Am I getting the strongest outcomes? Am I on track with my goals?”

Results from the SPIVA Scorecard can be viewed here.
Products March 16, 2018

ESOP Knowledge Can Provide Real Adviser Differentiation

In an interview with PLANADVISER, Jerry Ripperger, vice president of consulting at Principal, highlights a new, fee website the firm has rolled out to help advisers and their clients explore the potential benefits of launching employee stock ownership plans as part of a broader ownership transition.

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When it comes to retirement and business succession planning, survey data shows clearly that small business owners have given relatively little thought to how they’ll shift into retirement or enact an exit strategy.

According to Jerry Ripperger, vice president of consulting at Principal, more than 70% of business owners in the U.S. do not have a formal plan for exiting the business—yet very few are taking action today to craft a concrete strategy.

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Principal Financial Group hopes to make the effort a bit easier with the launch of a new website, Ripperger notes. Among the features, the site highlights employee stock ownership plans (ESOPs) as an important option for advisers and their clients to consider when assessing succession planning needs.

Advisers and business owners are encouraged to visit the website and use it to help guide dialogue with succession plans and future goals. Features include ways to help business owners see the value of a succession plan; answers to top questions advisers and business owners have about ESOPs; surveys to assess if an ESOP is the right approach for a client or potential client; ESOP benefits for advisers, business owners and their employees; and, naturally, access to Principal succession planning and internal ESOP expertise.

As a part of continued commitment to succession planning with ESOP education, Principal will roll out a series of activities in 2018 including blogs, event sponsorships, marketing materials, and regular updates to the new website.

Asked to talk about the motivation behind the new website, Ripperger tells PLANADVISER the firm’s ESOP practice has been growing steadily over the years.

“You will see that many of the service providers in this market only touch ESOPs, whereas we obviously have the broader connection to the whole retirement planning industry, including defined benefit, defined contribution and non-qualified plans,” Ripperger notes. “The ESOP conversation is interesting because it is a space where you can have the adviser, the ownership, and the employees all working together to find a way meet their collective objectives when it comes to benefits and retirement readiness for everyone.”

He urges readers to consider some sobering statistics: More than a third (35%) of business owners surveyed by Principal anticipate exiting their business within three years, and yet 72% of business owners say they do not have any formal succession plan in place.”

“That’s the challenge that our new website is aiming to tackle head on,” Ripperger says. “In many ways this gap is not surprising, especially when we’re talking about first generation businesses. The owners of these companies may have spent their entire working lives building the business. Worrying about finding the next client and the next product enhancement. To all of a sudden have to shift gears and ask, not only how do I sell this, but what will my life look life after the transaction? It can be a difficult journey for a lot of people.”

Another key statistic to point out is that, looking backwards, only about 6% of business owners in the U.S. selling their business in a given year are able to successfully transition ownership to a family member.

“The ESOP conversation really gets into the desires of the owner and of subsequent generations, who frankly may not have the same interests that mom or dad have had,” Ripperger explains. “People are also retiring later these days, so the kids may be in their 40s or 50s and already have their own established careers or even their own businesses.”

As Ripperger notes, in a perfect world, really the best time to start thinking about business succession planning will be when the owner is creating the business in the first place. They should be thinking, “How might I ultimately get my value out of this organization?”

“And this applies as well even when the small business owner is hoping to be able to keep the business in the family,” Ripperger adds. “When you look at the retirement readiness of these business owners, many of them have a substantial portion of their net worth tied up in their companies. If they want to maintain their standard of living, they’re going to have to extract some of the liquidity from the business they have built. Even if the business is being transitioned to the kids, we have to have a plan to pay for that, quite frankly.”

Ripperger goes on to note that, a big part of how advisers can help their clients see the benefits of an ESOP is also to show them how access to ESOPs can be a boon to the retirement readiness of the employees as well. He encourages readers to visit the free website to view some video case studies about how this whole process can unfold.

“It’s an area where it is great to be able to have case studies and examples of how things have worked for other business owners,” Ripperger concludes. “It’s very helpful to be able to point to these successful cases and it really motivates business owners to think deeply about the ESOP route. The interviews we have on the micro site are not scripted. Those are just the real employees talking directly about what the creation of the ESOP has meant to them philosophically and financially.”

Ripperger offers one additional consideration for advisers thinking of getting more involved in this type of work: “How does it benefit the adviser and the business owner? On the financial side, it goes without saying, that we are converting an illiquid asset into cash. That’s the bottom line. And so you will have these business owners who don’t necessarily have a lot of investable cash before the ESOP transaction, but then after the transaction they have a larger sum of cash on hand then they have ever had to deal with. And so it naturally is an opportunity for the adviser to help them manage through that process. There will be investing needs, insurance needs, income planning needs, and more.”

Beyond this, once that ESOP is in place, it becomes a retirement plan for the employees, which is another opportunity for the adviser to potentially come in and offer their services, better tying the ESOP to the 401(k) and all the other benefits.

“The adviser can help create the umbrella perspective,” Ripperger concludes.  

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