Twice a year S&P releases a key active-versus-passive report, called the S&P Index Versus Active (Spiva) scorecard. This differs from equivalent pieces of work in several important ways. The report corrects for survivorship bias by including all the funds that were available at the beginning of the period in question, rather than just those that were left standing at the end.
This is crucial, given that over the past five years around a quarter of equity funds and a fifth of fixed income funds have been merged away or liquidated. That makes for a lot of duds not factored into conventional performance averages.
The Spiva methodology also produces both asset-weighted and equally-weighted datasets. Focusing on the asset-weighted numbers is more helpful, since it means the inevitable handful of terrible small funds do not unduly skew the averages.
As an example of the impact of weighting, a standard equally-weighted analysis would suggest the average large cap US equity fund returned 31.37% last year. The asset-weighted figure is 31.74%, a significant enough difference to matter in a close race between active and passive.
Spiva also categorises funds according to relevant benchmarks, so mid cap strategies are not flattered by being compared with the S&P 500, for example. And finally Spiva is rigorous in assessing only the share classes with the greatest assets, not the ones put forward by the fund group on its fact sheet. Spiva also strips out all the index-linked mutual funds to leave only the truly active strategies.
So what does the latest scorecard reveal about 2013? Well, it was a very good year to back active mid cap managers – but perhaps only them.
On an asset-weighted basis the average large cap US equity fund lagged the S&P 500 by 67 basis points (bps) last year, while a typical small-cap US fund was fully 360bps behind the S&P SmallCap 600 index.
But the average mid cap manager beat the index by 164bps, with a total return of 35.14% versus 33.5% from the S&P MidCap 400.
Dig deeper into the data and it emerges that it was the value managers who let the active side down last year. The average large cap growth fund actually ended 2013 ahead of its benchmark, returning 35.01%, compared with the S&P 500 Growth’s 32.77%. Active small cap managers were just 59bps below their index.
But on the large cap value side active funds were 377bps behind their benchmark, and small cap value specialists lagged by 487bps – these are the managers who have been lamenting the ‘dash to trash’. In contrast, both value and growth-minded funds in the mid cap sector outperformed their style benchmarks.
More than half of international small cap managers beat their benchmark in 2013. This means they can now boast of having done so over one, three and five-year periods. No other sector has achieved this, according to the Spiva scorecard.
‘Regardless of the measurement time horizon, international small cap equity remains the only category that has shown persistent outperformance by active managers,’ commented Aye Soe, S&P’s director of index research and design.
Soe nonetheless remained sceptical about active equity managers in general. ‘It is commonly believed active management works best in inefficient markets such as small-cap or emerging markets – an argument we find to be unconvincing,’ she said.
The Spiva report also covers fixed income, and in this sphere active managers had a strong year – in relative, if not absolute, terms.
Again on an asset-weighted basis, the average investment grade long fund lost 0.42% in 2013 while the Barclays Long Government/Credit index plunged by 8.83%. Long-only government bond funds similarly outperformed, slipping 4.61% while their benchmark dropped 12.47%.
Yet if active management did offer some downside protection in those asset classes, it failed to capture all the upside in the better performing high yield market. There, the average active fund returned 6.73% last year compared with a 7.46% rise in the Barclays High Yield index.
‘Most active fixed income managers in the longer-term government, longer-term investment grade and global income categories outperformed the corresponding benchmarks,’ said Soe.
‘At the same time, the one-year data also demonstrates the difficulty in predicting the interest rate path as highlighted by the underperformance of short-term government, high yield and mortgage-backed security bond funds.’
Short duration government bond funds lagged by 367bps last year, although on the corporate side short duration products did eke out a modest 26bps of outperformance.