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RP: The best-known ongoing research into the performance of actively managed funds is conducted by S&P Dow Jones Indices. Every six months, the company produces what it calls its SPIVA scorecard for funds in different countries around the world. It consistently shows that, over time, only a small proportion of funds succeed in beating the market.
TE: We use a local market database to identify, first of all, all the active funds that have been operating in a particular category. like UK equities or Danish equities or US large caps. And, then we will report all sorts of statistics. It’s actually a very rich report, most people tend to focus on the top-line number, report one, which reports the percentage of funds that beat the benchmark.
RP: Advocates of active management often say the SPIVA data is all very well, but what if you can identify the winners in advance? However, something else that SPIVA shows is that there’s very little persistence in outperformance, so picking a winner based on past performance is extremely difficult.
TE: It must be said there are other ways to identify active managers except for past track-record. But, if skill exists and is identifiable, you would expect it to turn up in prior performance. What these reports show is, that over time, it is actually not the case, that just focusing on the top half of all funds or the top quartile of all funds historically really gives you any better chance of outperforming then just picking at random.
RP: As with all data, it’s important to look at where it comes from. Because it makes its money from licensing indices, S&P Dow Jones Indices has benefited from the growth of passive investing. So, can it be trusted?
TE: We have benefited, as a company, from a trend towards greater transparency and passive investing, because people are using our indices as the basis for investment products. Having said that, what we noticed a while ago was that the debate around where indices might be a good idea or where passive fits in the portfolio was conducted in a very emotional context: “I think this is good”, “Index Funds are un-American” or, whatever it is. What we wanted to do with SPIVA was to inform the debate.
RP: If you haven’t yet seen a SPIVA report for your part of the world, it’s having worth a look. The web address is us.spindices.com/spiva. That’s us.spindices.com/spiva.
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