The SPIVA Canada scorecard, a Standard and Poor’s report on the relative performance of active mutual funds relative to their benchmark index, was released a few days ago. For over ten years, this report has documented the underperformance of active management. Less well-know is the fact that the same analysis is published for other major markets around the world. We would like to discuss the results observed in all developed markets, except Japan (the SPIVA Japan report is published in Japanese!).
Canada
The majority of active funds underperformed over five years, with the exception of Canadian small and mid cap equity funds, half of which outperformed their benchmark. Overall, this category surpassed the benchmark by 1.71% (2.32% vs. 0.61%). Last year, we were shocked at the extremely poor performance of Canadian dividend and income equity funds. This category fared better in 2015, with 24% (vs. 0% at the end of 2014) of active funds beating the benchmark. Overall, however, the majority of active funds underperformed in six out of seven categories.
Table 1: Percentage of Canadian active funds outperforming over 5 years
CATEGORY |
BENCHMARK INDEX |
% OF OUTPERFORMERS |
Canadian equity |
S&P/TSX composite |
34% |
Canadian small/mid cap equity |
S&P/TSX completion |
50% |
Canadian dividend & income equity |
S&P/TSX Canadian dividend aristocrats |
24% |
U.S. equity |
S&P500 in Canadian dollars (CAD) |
1% |
International equity |
S&P EPAC LargeMid cap in CAD |
7% |
Global equity |
S&P developed LargeMid cap in CAD |
6% |
Canadian focused equity |
50% S&P/TSX Composite. 25% S&P500 in CAD, 25% S&P EPAC LargeMid cap in CAD |
7% |
Source: Standard & Poor’s
U.S.
The majority of funds underperformed in most categories over five years, although a few pockets of strength are reported, such as investment-grade bonds, municipal bonds and bank loans. Several categories reported less than 10% of outperformers. Overall, the majority of active funds underperformed in 27 of 32 categories.
Table 2: Percentage of U.S. active funds outperforming over 5 years
CATEGORY |
BENCHMARK INDEX |
% OF OUTPERFORMERS |
All domestic equity |
S&P Composite 1500 |
12% |
All large cap |
S&P 500 |
16% |
All mid cap |
S&P MidCap 400 |
13% |
All small cap |
S&P SmallCap 600 |
10% |
All multi cap |
S&P Composite 1500 |
11% |
Large cap growth |
S&P 500 growth |
13% |
Large cap core |
S&P 500 |
12% |
Large cap value |
S&P 500 value |
18% |
Mid cap growth |
S&P MidCap 400 growth |
19% |
Mid cap core |
S&P MidCap 400 |
23% |
Mid cap value |
S&P MidCap 400 value |
30% |
Small cap growth |
S&P SmallCap 600 growth |
8% |
Small cap core |
S&P SmallCap 600 |
9% |
Small cap value |
S&P SmallCap 600 value |
8% |
Multi cap growth |
S&P Composite 1500 growth |
9% |
Multi cap core |
S&P Composite 1500 |
9% |
Multi cap value |
S&P Composite 1500 value |
23% |
Real estate |
S&P U.S. Real estate investment trusts |
17% |
Government long bonds |
Barclays long government |
1% |
Government intermediate bonds |
Barclays intermediate government |
32% |
Government short bonds |
1-3 year government |
36% |
Investment grade long bonds |
Barclays long government/credit |
4% |
Investment grade intermediate bonds |
Barclays intermediate government/credit |
58% |
Investment grade short bonds |
1-3 year government/credit |
70% |
High yield bonds |
Barclays high yield bonds |
21% |
Mortgage backed securities |
Barclays mortgage back securities |
35% |
Global income |
Barclays global aggregate |
49% |
Emerging market debt |
Barclays emerging markets |
6% |
Loan participation |
S&P/LSTA leveraged loan 100 |
58% |
General municipal debt |
S&P Municipal bond |
57% |
California municipal debt |
S&P Municipal bond – California |
58% |
New York municipal debt |
S&P Municipal bond – New York |
38% |
Source: Standard & Poor’s
Europe
Only the U.K. large cap / mid cap category included a majority of outperforming active funds (at 54%), although several active managers managed to show more than 40% of outperformers. But overall, active funds underperformed in 22 of 23 categories.
Table 3: Percentage of European active funds outperforming over 5 years
CATEGORY |
BENCHMARK INDEX |
% OF OUTPERFORMERS |
Euro denominated |
Europe equity |
S&P Europe 350 |
19% |
Eurozone equity |
S&P Eurozone BMI |
12% |
Nordic equity |
S&P Nordic BMI |
29% |
Global equity |
S&P Global 1200 |
4% |
Emerging market equity |
S&P/IFCI |
11% |
U.S. equity |
S&P 500 |
3% |
France equity |
S&P France |
17% |
Germany equity |
S&P Germany |
28% |
Italy equity |
S&P Italy |
48% |
Spain equity |
S&P Spain |
31% |
Netherlands equity |
S&P Netherlands |
0% |
GBP denominated |
Europe equity |
S&P Europe 350 |
42% |
Europe ex. U.K. |
S&P Europe ex-U.K. BMI |
40% |
U.K. |
S&P United Kingdom BMI |
47% |
U.K. large/mid cap |
S&P United Kingdom LargeMidCap |
54% |
U.K. small cap |
S&P United Kingdom SmallCap |
22% |
Global equity |
S&P Global 1200 |
10% |
Emerging market equity |
S&P/IFCI |
26% |
U.S. equity |
S&P 500 |
5% |
Other European currencies |
Denmark equity |
S&P Denmark |
12% |
Poland equity |
S&P Poland |
42% |
Switzerland equity |
S&P Switzerland |
5% |
Sweden equity |
S&P Sweden |
24% |
Source: Standard & Poor’s
Australia
Australian mid & small equity posted the most impressive performance of this review, with a strong 71% of active funds outperforming the benchmark. Furthermore, on an asset-weighted basis, active funds in this category outperformed the benchmark by over 5% (7.84% vs. 2.48%). Nevertheless, overall, a majority of active funds underperformed in four of five categories.
Table 4: Percentage of Australian active funds outperforming over 5 years
CATEGORY |
BENCHMARK INDEX |
% OF OUTPERFORMERS |
Australian equity general |
S&P/ASX 200 |
33% |
Australian equity mid & small cap |
S&P/ASX mid-small cap |
71% |
International equity |
S&P developed ex-Australia LargeMid cap |
12% |
Australian bonds |
S&P/ASX fixed interest 0+ |
13% |
Australian equity A-REIT |
S&P/ASX 200 A-REIT |
15% |
Source: Standard & Poor’s
Conclusion
Jointly for Canada, the U.S., Europe and Australia, most active funds underperformed over the last five years, in 59 of 67 categories. Investors who opt for active funds face an 88% likelihood of underperformance. When reading these tables, the temptation may be great to focus on the rare asset classes where active management has done better. However, these winning categories change from time to time. Furthermore, some of these positive performances may be attributable to manager drift: a manager investing outside its mandated asset class. An outperformance driven by manager drift is generally a random result and should not be expected to be repeated in the future.
Overall, in the race for long-term performance, evidence shows that passive funds greatly surpass active. Investors are increasingly coming to understand this, which is why passive funds have steadily increased their market share over the years.