RP: Hello there. One of the fundamental principles of evidence-based investing is that over any meaningful period of time, only a tiny fraction of actively managed funds outperform the index.
The industry is always putting out data which appears to tell a different story. So how do investors find a true picture? One of the most reliable sources of information about fund performance is SPIVA, the Index Versus Active scorecard produced by S&P Dow Jones Indices. Craig Lazzara is the company’s Global Head of Index Investment Strategy.
CL: We have accessed a database of mutual fund data initially in the US and then tried to compare funds of a particular type against an appropriate benchmark index, so for example, large-cap US funds against the S & P 500, mid-cap funds against the S & P mid-cap 400, growth against growth, value against value, small against small and so forth. And when you do that, then we simply compute every six months, how did the average fund do, how many of them beat the benchmark index, how many of them underperformed? Very very typically, the answer is that the majority, in some cases a very decisive majority of active funds underperform. Certainly, that’s been the case over the last several years in the US and globally as we’ve expanded the concept.
RP: One of the biggest and most common flaws with fund performance data provided by the asset management industry is that it doesn’t include the impact of costs.
Fees and charges make a big difference to net returns, especially over the longer term. Thankfully, the SPIVA data does take cost into account.
CL: The data we’re looking at are net asset values for mutual funds, and so those NAVs would include a withdrawal of the manager’s fee, obviously the trading costs that were incurred to change portfolios will be there. So, in terms of the active manager’s costs, they’re there. Now you compare those costs against the S & P 500 which is an unmanaged index, you can’t buy the index directly, so if you really wanted to be precise you could subtract six or eight basis points from the S & P 500’s return which would make no difference to the results, which is why we don’t do it.
RP: There are other reasons why SPIVA is more reliable than similar fund scorecards. For example, it’s also adjusted for survivorship bias; in other words, it takes into account the fact that there are a large number of funds that perform so poorly that they’re either closed down or merged with other funds.
If you’re interested, SPIVA really is worth a closer look. You’ll find all the latest data on the S&P Dow Jones Indices website.
Thank you for watching.
Don’t forget to subscribe to our YouTube channel where you'll find acres of digestible investor education - no matter what you're investing for.
By subscribing, you can dip in and out and tailor your own learning programme.
Or get back to our Video Library to find more digestible content.