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Where did passive work best last year?

by Robert St George on Apr 02, 2014 at 13:07

Where did passive work best last year?

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.

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