Hi Guys,
The SPIVA reports have been issued for over a decade now, and the primary conclusions have remained constant during this entire period. Although percentages change depending on the market environment, less than half active mutual fund managers outperform applicable Indices.
The law of conservation of returns demands this outcome since these active managers are themselves mostly the marketplace. Their cohort underperformance can be roughly estimated by considering the negative impact of costs and fees in the mix.
SPIVA has done yeomen work in measuring the shortfall distributions in terms of asset classes (large/small, growth/value, US/International, government/corporate bonds, etc.). To fully appreciate and exploit the SPIVA studies, a nuanced review of the many SPIVA tables is required. I recommend that interested MFOers invest that required time.
SPIVA does NOT compare, nor do they advise comparing, the bulk of their funds against a single reference standard. That’s wrongheaded. It is meaningless to contrast the returns of a Small Cap Value fund against the S&P
500 measure. These are obviously horses of a totally different color.
The referenced ETF Trends article quoted the 86% record for only one year (2014) and only represented those funds that are assigned to the Large Cap category. The assumption that there are 8,000 funds in that grouping is wrong. In fact, there are typically slightly over 1,000 funds in that classification with a period survival rate that is less than 100%. The 8,000 assumption is grossly in error.
Therefore, it’s incorrect to calculate that 1,120 active fund managers outdistanced the S&P
500. Also, using a single year’s performance data is similarly wrongheaded; returns are simply too jumpy and non-repeatable year-to-year to reliably use a single year for decision making.
Even with this correction, a respectable number of active managers do indeed outdistance their benchmarks. But it is a narrow field, and Alpha (excess returns) is a vanishing quantity; a deeper examination of the SPIVA data sets quickly uncovers the disappearing Alpha phenomena. Superstars exist in all professional fields, although the stars’ output does erode with time. So too in the active fund management discipline.
The erosion of overall Alpha these days is often attributed to the abundant expert, field leveling status of all fund managers. Jesse Livermore, Benjamin Graham, and Warren Buffett battled weaker opponents when establishing their superior records. The persistent perils are becoming a rare find.
Please do not interpret this post as being generated by a fully committed Indexer. I am not. I am moving in the Indexer direction, but I still maintain over 30% of my portfolio under active fund management. Winners are out there.
It is a challenge in a multi-dimensional world to identify the potential (never with certainty) winners. A history of positive Alpha is surely a good starting point. Style consistency and tenure are also contributing factors. Also smaller fund size allows the active manager to be more agile. Perhaps the single best discriminator is the overall cost of the fund. The most promising funds offer the lowest ownership costs.
Several Vanguard studies that have been referenced on MFO earlier demonstrate a situational advantage for active management. Here are repeat Links to that work:
http://www.vanguard.com/pdf/s356.pdfhttps://pressroom.vanguard.com/content/nonindexed/7.5.2013_The_bumpy_road_to_outperformance.pdfAdmittedly, Vanguard is constantly grinding its axe, however, please checkout both the Vanguard studies and the SPIVA series. They’ll guide you in identifying solid active fund managers, without any guarantees of course. For example, the SPIVA data clearly show that an investor has a highly likelihood of selecting a superior Alpha fund manager for a Large Cap Value fund then for a Large Cap Growth fund.
To end on a happy note, I’m sure you all know the story about what they call a mushroom who goes into a bar and orders drinks for the house. A fungi (a fun guy).
Sorry about that. I suppose this tarnishes my image still further. My stock picking skills are no better than my joke selection skills. That’s yet another reason why I go the mutual fund route.
Best Wishes.
