The 2016 SPIVA U.S. Scorecard is out and, as expected Index Funds are the big winners!
What is the SPIVA Scorecard? SPIVA stands for S&P Indices Versus Active and they produce the go-to scorecard for active fund managers worldwide. The SPIVA Scorecard is a widely-referenced research report conducted and published by S&P Dow Jones Indices, a division of S&P Global. Historically, the SPIVA report has demonstrated repeatedly that actively managed funds have underperformed their benchmarks over short- and long-term periods. Even when actively managed funds do outperform the benchmark over one time period, they have consistently failed to do so over multiple time periods.
Before getting into the results for 2016, let me first share a few key aspects regarding the SPIVA methodology. The SPIVA Scorecard researchers go to great lengths to make sure the robust data they compile is accurate and offers a fair comparison. In pursuit of accurate analysis, the SPIVA Scorecard addresses the following unique issues:
- Survivorship Bias Correction: Actively managed mutual funds are often merged or liquidated during the applicable period of study. Many studies fail to include the results of the mutual funds that did not survive. The SPIVA Scorecard accounts for the entire set of mutual funds that were standing at the outset of the period being measured –not just the survivors– which eliminates survivorship bias.
- Apples-to Apples Comparison: Many active fund managers exaggerate their performance by reporting their fund’s result against an inappropriate benchmark. For example, they will compare a small cap value fund to the S&P 500 benchmark. SPIVA Scorecards measure a fund’s returns against returns of the appropriate benchmark applicable to the investment category. For instance, Large Cap Blend vs. the S&P 500 index fund.
- Asset-Weighted Returns: Average returns for a group of actively managed funds are often calculated using equal weighting even though one fund will have 10 billion dollars in assets and the other fund may only have 10 million dollars in assets. The SPIVA Scorecard uses weighted average returns for the applicable asset category so that each fund’s return is weighted by net assets. The SPIVA Scorecard does reflect both equal- and asset-weighted averages.
- Style Consistency: SPIVA Scorecards measure style consistency for each style category (large-cap vs. small-cap; growth vs. value) across different time horizons. This is important because style drift (the tendency of funds to depart from their initial investment categorization) can have an impact on asset allocation decisions.
- Data Cleaning: SPIVA Scorecards avoid double counting multiple share classes in all count-based calculations, using only the share class with greater assets.
Show me the money:
You can see the full report by clicking here, but below is a chart reflecting the percentage of actively managed funds that failed to beat the applicable benchmark:
SPIVA U.S. Scorecard: year-end 2016
|1 YEAR (%)||3 YEAR (%)||5 YEAR (%)||10 YEAR (%)|
|S&P Comp. 1500||90.2||87.41||94.58||87.47|
|Large Cap||S&P 500||84.62||81.31||91.91||85.36|
|Mid-Cap||S&P MidCap 400||87.89||83.81||87.87||91.27|
|Small-Cap||S&P Sm. Cap 600||88.77||94.07||97.58||90.75|
|S&P 500 Growth||95.1||90.32||97.38||98.59|
|S&P 500 Value||77.04||82.44||88.78||67.76|
|S&P MidCap |
|S&P MidCap |
|S&P Sm. Cap |
|S&P Sm. Cap|
|S&P US Reit||90.53||67.74||89.11||89.16|
As you can see from the astonishing results, active management fails to beat the relevant benchmark by an overwhelming percentage. When you factor in the costs of active management, index fund investing is the clear winner. Bottom line: accept the returns offered by the markets at substantially lower costs, then sit back, relax, and go enjoy your life. Have a good week!