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.

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.

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.