How are financial advisors putting SPIVA data to work to help clients achieve their goals? S&P DJI’s Sue Lee joins Thriving Wealth’s John Cachia to dive into the most recent SPIVA Australia Scorecard and its practical applications for market participants.
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Andrew Geoghan:
How are financial advisors putting SPIVA® data to work to help clients achieve their goals? For more than 20 years, S&P Dow Jones Indices has published its SPIVA Scorecards that measure actively managed funds against their index benchmarks. SPIVA data regularly demonstrates that, over time, most active managers fail to beat the benchmark.
Hello, I'm Andrew Geoghegan from ausbiz, and joining us today to discuss key takeaways and practical applications of the latest SPIVA Australia Scorecard are Sue Lee, Head of Index Investment Strategy, APAC, at S&P Dow Jones Indices, and John Cachia, Founder and Strategic Wealth Advisor at Thriving Wealth. Sue and John, welcome.
Sue Lee, John Cachia:
Thanks very much. Thanks for having us.
Andrew Geoghan:
Sue, let me start with you. Can you just explain to us what the SPIVA Scorecard is and why it matters?
Sue Lee:
SPIVA stands for S&P Indices versus Active. So, basically, we look at the active funds available in different domiciles. In the case of Australia, we look at the funds available in Australia and look at their performance relative to benchmarks. So we look at the major categories. In the case of Australia, global equities and Australian large-cap equities and mid-small-cap equities and REITs and Australian bonds, five categories.
So we really deep dive the performance of active funds in different time horizons, and also we look at the market environment which contributed to the relative performance of active managers. And why does it matter? It actually tells you, the data will tell you, where active is working and where the passive might be a better alternative.
Andrew Geoghan:
So John, how important is this for you as a financial advisor, how you share the insights of the SPIVA Scorecard with your clients and how it helps them in terms of making those decisions on portfolio construction.
John Cachia:
Well, the report is really good because it really validates the way that we think at Thriving Wealth in regard to making data-driven decisions to achieve our clients' results. So, this report really kind of dives into why we go down that index-based approach.
And so, when you see some of the kind of data around active versus passive, it really demystifies some of the thoughts that some people have when they're working with a financial advisor, that we need to pick the winner all the time, where we should be actually trying to go and focus on the index-based investing, because that's the one that's giving the results.
Andrew Geoghan:
Now, in fact, the latest SPIVA Australia Scorecard has just been released, Sue. What are some of the most notable findings from that?
Sue Lee:
2024 was a very interesting year where we saw very different results across different asset classes. So, for example, global equity funds in Australia, they had the worst, among the worst years. 85% of the funds actually underperformed the S&P World Index, our developed equity benchmark. Domestic equity managers did relatively better. In the Australian Equity General Funds category, 56% underperformed the S&P/ASX 200. And the mid-small-cap fund managers did relatively even better, about 36% underperforming the S&P/ASX Mid-Small Index. On the other hand, Australian bond managers actually did very well, 70% of the fund managers actually outperforming the S&P/ASX Australian Fixed Interest 0+ Index.
But what's more interesting, especially, and then more important to the financial advisors, is the long-term outcome. So, every year you will see different numbers, but then when you look at the longer term, we see most of the funds, regardless of the asset classes and categories, underperform the benchmark.
Andrew Geoghan:
So John, how important is information like that to you, particularly in terms of communicating with your clients, and what sort of reaction do you get from them?
John Cachia:
It's really good because it helps with the education around how things are moving both for the short term and the long term, and how different decision-making has an impact on their results. So it's very good. Actually, when the latest report comes out, we send it out and communicate it to our clients and explain it to them as well too. So, we believe if they're better educated, they can make better decisions on a daily basis, and this tool, and with a lot of the stuff that S&P Global does, it does really keep our clients informed and obviously help us with achieving their goals.
Andrew Geoghan:
So, at the moment, a lot of market volatility, Sue. What are some of those trends you're seeing in the Australian market, I guess through that SPIVA lens, and the challenges faced by those active managers, and perhaps whether that carries through to other markets too covered by SPIVA.
Sue Lee:
Yes, if we look at the market environment in 2024, it remained largely similar to 2023. So in terms of dispersion, if you look at how stocks move differently from each other, the dispersion was actually quite wide, which means active managers actually had a decent opportunity to pick the ones that outperform the index or move differently, outperformers.
But what happened was a lot of these outperformers were actually the large-cap stocks. So if you think about what implications that has on active managers, a lot of active managers have portfolio weightings different from the benchmark and often do not have as high weightings in these large-cap names, and any active manager who employs such a strategy would not have done well in 2024 and 2023.
And another implication of the large-cap outperformance is the stock return distribution. So when the outperformers are actually these large-cap names, they actually have a significant impact on the index return. Hence, the rest of the stocks in the index actually underperform the index. So in the case of the S&P/ASX 200, 60% of the index constituents underperformed the index in 2024. And that number is even more striking in the U.S. 73% of the index constituents underperformed the S&P 500. So, when there are fewer names that can outperform an index, then active managers who are trying to find outperformers, they have harder times.
Andrew Geoghan:
Sue and John, thanks so much for your time today. Thank you.
And if you'd like to find out more about the latest SPIVA research findings, please visit the website at the link below. That's https://www.spglobal.com/spdji/en/spiva
