Thursday, March 15, 2012

SPIVA Scorecard Year-End 2011

By Tim Dulaney, PhD

S&P recently released their semiannual report comparing the performance of actively managed mutual funds against their appropriate benchmark indices (the PDF can be found here).  The S&P Indices Versus Active Funds (SPIVA) Scorecard contains information the mutual fund industry would likely prefer to be kept quiet.

The Year-End 2011 SPIVA Scorecard reports that "over a five-year horizon[...] a majority of active equity and bond managers in most categories lag comparable benchmark indices."  Actively managed mutual funds are shown to empirically exhibit lower returns nearly independent of style, asset class or market.

An argument frequently made by investment companies is that indexing is appropriate for large-cap markets while actively managed funds are appropriate for small-cap markets (due to liquidity concerns, etc.).  Contrary to this assertion, the Year-End 2011 SPIVA Scorecard notes "indexing works as well for U.S. small-caps as it does for U.S. large-caps."

Another argument frequently presented by proponents of active managers is that the managers earn their keep when markets begin to go south.  They argue that talented managers are able to time the market and produce a more defensive portfolio in these situations.  According to the Year-End 2011 SPIVA Scorecard, the data in no way supports this contention.  "In the two true bear markets the SPIVA Scorecard has tracked over the last decade, most active equity managers failed to beat their benchmarks."  Anyone who says they can consistently time the market is probably not telling the whole truth.

Fee minimization is an important component of investing.  Actively managed mutual funds generally command higher fees and as such would need to exhibit higher returns for investors to realize even comparable net returns to lower-fee alternatives.  Of course, with higher returns comes higher risk.   As we showed in a previous blog post, even within the category of indexed mutual funds and ETFs, the fees can vary dramatically.

Investors must weigh the benefits of low-fee indexed mutual funds (and ETFs!) against the supposed benefits of actively managed mutual funds.  Investors should determine the exposure they require and then minimize the fees they are willing to pay for that exposure.


2 comments:

  1. Very informative. Just one question: when computing the mutual fund returns, does the SPIVA Scorecard adjust for expenses, or loads, or both? How about taxes?
    Thanks!

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    Replies
    1. Fund returns are reported net of fees, excluding loads. I'm fairly certain there is no adjustment for taxes since this adjustment would be hard to complete in any meaningful way.

      Thank you for your interest and questions.

      Tim D.

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