Articles for Financial Advisors

Active vs. Passive Management

Active vs. Passive Management

Active  vs.  Passive  Management  

Each year, S&P Dow Jones Indices looks at the percentage of actively managed mutual funds that outperform their respective benchmarks. The SPIVA Scorecard shows actively managed funds constantly underperform their indices. For example, the December 2012 S&P Indices vs. Active Funds showed 56-80% of actively managed funds trailed their S&P asset class in all domestic and global categories, except one (large cap value funds), for the 1-year period.

 

% of Mutual Funds Underperforming Their Benchmark

 

Fund Category

1 Year

5 Years

All Multi-Cap

70%

80%

Multi-Cap Growth

55%

90%

Multi-Cap Value

75%

65%

All Large-Cap

65%

75%

Large-Cap Growth

50%

90%

Large-Cap Value

85%

50%

All Mid-Caps

80%

90%

Mid-Cap Growth

90%

95%

 

Mutual Funds Underperforming Their Benchmark

 

Fund Category

1 Year

5 Years

Mid-Cap Value

80%

75%

All Small-Cap

70%

85%

Small-Cap Growth

70%

90%

Small-Cap Value

65%

70%

Global

70%

65%

Foreign

50%

75%

Foreign Small-Cap

15%

20%

Emerging Markets

50%

80%

 

Over the 5-year period, 50-92% of U.S. equity and 21-75% of global and foreign equity funds trailed their S&P benchmarks. In 2010, just 5% of U.S. and U.K. equity or bond funds had positive alpha (source: Financial Markets, Institutions & Instruments, May 2010). Over the 5-year period (ending 12/31/2012), 0.1% top-quartile active managers stayed in the top quartile. Keith Cuthervertson (co-author of “Mutual Fund Performance: Measurement and Evidence,” a May 2010 article) found persistence consistency only among active mangers that rebalanced frequently.

 

A June 2013 paper by Ferri and Benke, showed funds with the highest expense ratios (those in the top half) underperformed their index fund counterparts 70-80% of the time.

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