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RP: Hello there. Time and again, the evidence shows that only a small fraction of actively managed funds succeed in beating the market with any degree of consistency. But the true picture is actually even more bleak for active management than the figures suggest. That’s because of something called survivorship bias, as Craig Lazzara of S&P Dow Jones Indices explains.
CL: Let’s say if I have a universe of a thousand funds 10 years ago. I follow those funds through time. Some of them are not going to do very well. The ones that didn’t do very well are likely to go out of business or merge into other funds. So, of those thousand funds, 10 years ago, maybe today 800 still exist in the same form they existed previously. Those 800 are biased, they are not randomly chosen. It’s the 800 that have done well enough to survive until today.
RP: Most comparisons between active fund performance and the index are not adjusted for survivorship bias. One notable exception is SPIVA — the S&P Indices Versus Active Funds Scorecard. SPIVA compares the performance of different funds with the relevant index. Initially, it just covered the US, but there are now scorecards for other parts of the world as well.
CL: We simply compute every 6 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 in the last several years in the US but also globally as we expanded the concept.
RP: By way of example, the SPIVA scorecard for Europe for the ten-year period ending in mid-2015, showed that 89% of global funds and 91% of US equity funds failed to beat the market over five years. Over ten years, the figures are worse still.
The same scorecard also showed that just 46% of UK equity funds survived the full ten years; the figure for UK large- and mid-cap equity funds was just 41%.
That’s right, 59% of funds in that sector were either closed down or merged with other funds, almost always because of poor performance.
Survivorship bias really is a serious issue.
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