Tuesday, March 26, 2013

SPIVA Scorecard Year-End 2012

By Tim Dulaney, PhD and Tim Husson, PhD

S&P Dow Jones Indices recently released their year-end 2012 report comparing the performance of actively managed mutual funds against their benchmark indices (we covered the year-end 2011 report previously).  The S&P Indices Versus Active Funds (SPIVA) Scorecard once again shows that, for the most part, mutual funds tend to underperform their benchmarks:
The year 2012 marked the return of the double digit gains across all the domestic and global equity benchmark indices. The gains passive indices made did not, however, translate into active management, as most active managers in all categories except large-cap growth and real estate funds underperformed their respective benchmarks in 2012. Performance lagged behind the benchmark indices for 63.25% of large-cap funds, 80.45% of mid-cap funds and 66.5% of small cap funds.
On the other hand, the scorecards states that small cap funds "continue to outperform the benchmark regardless of the period being measured, indicating that active management opportunities are still present in this space."

Moreover, the SPIVA scorecard was not confined to the equity markets.  Within the fixed income universe, the report finds the although many fixed income funds outperformed their benchmark in 2012 -- for example, only 21.8% of "Global Income Funds" were outperformed by their benchmark -- when the investment horizon is increased to three or even five years these funds begin to exhibit characteristics more in line with their equity counterparts.  The only category to consistently outperform their benchmark using a five-year horizon is the "Investment-Grade Intermediate Funds" which have the Barclays Intermediate Government/Credit index as their benchmark.

The general inability of managers to consistently outperform their benchmarks is likely related to the results of another S&P study that we recently covered.  That study showed that high performing funds tend not to maintain that performance for long.  Since active funds not only underperform their benchmarks but cannot maintain overperformance, the value of relatively high-cost active strategies could be considered suspect.   As issuers continue to make low-cost ETF clones of their relatively high-cost mutual funds, investors may want to consider these alternatives.

Interestingly, CalPERS, one of the largest pension funds in the US, has recently indicated that it may be moving to a passive-only investment strategy, a strategy consistent with the SPIVA results.  That article also points to an increase in the percentage of ETF and mutual fund assets that are now considered passively managed, though active funds are still some 72% of the market.

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