Active Fund Winners? Emerging Markets Small-Cap Funds

Twice a year, S&P releases a “SPIVA Scorecard” – a report comparing the performance of Active Managers versus three passive indices. The S&P 500 large caps, S&P MidCap 400, and S&P SmallCap 600 are pitted against the median returns of active managers.

In the most recent report, the trailing 12 months returns for these indices were 20.60%, 25.18% and 25.18%, respectively (latest data is as of June 30, 2013).

Gains in major the indices were not duplicated by the universe of actively-managed funds. As is typical, most active managers underperformed their respective benchmarks. S&P notes that “59.58% of large-cap funds, 68.88% of mid-cap funds and 64.27% of small-cap funds underperformed their respective benchmark indices” over the trailing 12 months. Performance of active managers were equally unfavorable over three- and five- year periods. Most International equity did no better.

The three-year data is especially damning: In the universe of “All Domestic Equity Funds,” 78.90 percent were outperformed by the S&P Composite 1500. Active managers did better over five years, with 72.14 percent being outperformed.

Three kinds of funds did especially poorly over three years: Large-Cap Growth Funds (active outperformed by passive in 92.11 percent of the funds), Mid-Cap Growth Funds (passive outperformed 92.86 percent) and Real Estate Funds (a whopping 95.07 percent outperformance).

The one notable bright spot among active managers: Emerging markets small-cap funds. They have outperformed for a number of years. That suggests that managers can find Alpha by fishing in waters where there are fewer commercial vessels with trawling nets at work.

The SPIVA Scorecard tends to show much worse performance than other active versus passive studies. My knee-jerk inclination was to assume S&P, a purveyor of passive indexes, was biased. However, a closer look at their statistical work shows they are correcting for biases that typical comparisons omit.

The biggest correction appears to be for Survivorship bias. S&P corrects for those funds that were liquidated (or merged) over the course of a year. Studies that fail to account for funds that close will boost the apparent returns of the set of active managers. Accounting for the entire set of active managers — not just those that succeed and survive — eliminates survivorship bias.

The data strongly shows the advantages of passive indexing. Where many people misinterpret it is in assuming that it means there is no role of active management. That’s the wrong interpretation. There is a place in portfolios for active managers — but it’s probably a smaller slice of holdings than many investors have currently.


S&P Indices Versus Active Funds (SPIVA) Scorecard Mid-Year 2013

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