Active managers still losing to indexes


Index funds are still beating actively managed funds like a piñata at a 10-year-old’s birthday party, according to Standard & Poor’s. But the American Funds says advisers can avoid some truly awful funds with a few simple, additional screens.

The mid-year S&P Indices vs. Active (SPIVA) scorecard shows that actively managed funds are routinely clobbered by index funds.

“Over the one-year period, 56.6% of large-cap managers, 60.7% of mid-cap managers and 59.6% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively,” said the report, which covered performance through June 30. Growth managers fared better than their core and value counterparts, reflecting the strong returns from technology stocks such as Amazon and Netflix.

Surprisingly, the one-year SPIVA results were stronger for active funds than the report six months earlier. But long-term results remain sadder than a rodeo clown in an elephant stampede.

Over the past five years, 82.4% of large-cap managers, 87.2% of mid-cap managers and 93.8% of small-cap managers lagged their respective benchmarks.

The SPIVA report is adjusted for funds that either merge or liquidate. In the past 15 years, 58% of U.S. stock funds and 55% of international stock funds have been shuffled off to Palookaville.

Steve Deschenes, product management and analytics director at Capital Group, thinks the SPIVA methodology has some important flaws. For one thing, most passively managed funds don’t beat their index, either: They lag by the amount they charge in expenses. For example, the Vanguard 500 Index fund investor share class has lagged its benchmark Standard & Poor’s 500 stock index by 0.13 percentage points a year — a figure that’s almost entirely due to its 0.14% annual expense ratio.

Mr. Deschenes argues that two simple screens can help advisers choose funds more likely to beat their benchmarks:

Low expenses. Fund managers have a tough enough time beating their benchmark, and doing so with a 1.5% expense ratio is a Herculean feat.

High management ownership. Not surprisingly, managers whose lifestyle depends on their funds’ performance tend to do better than those who don’t invest in their own fund.

Capital Group, managers of the actively managed American Funds, looked at 20 years’ worth of performance and found that funds in the top quartile of both criteria tended to outperform over the long term. (U.S. funds with an expense ratio…

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