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Risk-Adjusted SPIVA® Scorecard: Year-End 2019

Latin America Persistence Scorecard May 2020

SPIVA® India Year-End 2019

SPIVA® Japan Year-End 2019

SPIVA® U.S. Year-End 2019

Risk-Adjusted SPIVA® Scorecard: Year-End 2019

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

Modern Portfolio Theory tells us that higher returns tend to be associated with higher risk. While our SPIVA Scorecards typically show that active funds underperform their benchmarks in absolute returns, they do not address the claim that active funds may be superior to passive investment after adjusting for risk.

As an extension of the standard SPIVA Scorecard, the Risk-Adjusted SPIVA Scorecard assesses the risk-adjusted returns of actively managed funds against their benchmarks on both a net-of-fees and gross-of-fees basis. We consider volatility, calculated through the standard deviation of monthly returns, as a proxy for risk, and we use return/volatility ratios to evaluate performance.

In the past decade in U.S. equity markets, the S&P 500® gained 257%, with positive total returns in 9 of 10 years and 86 of 120 months. However, these steady tailwinds did little to boost the case for active fund managers. After adjusting for risk, the majority of actively managed domestic funds in all categories underperformed their benchmarks on a net-of-fees basis over mid- and long-term investment horizons.

The risk-adjusted performance of active funds obviously improves on a gross-of-fees basis, but even then, outperformance is scarce. Only Real Estate (over the 5- and 15-year periods), Large-Cap Value (over the 15-year period), and Mid-Cap Growth funds (over the 5-year period) saw a majority of active managers outperform their benchmarks. Overall, most active domestic equity managers in most categories underperformed their benchmarks, even on a gross-of-fees basis.

As in the U.S., the majority of international equity funds across all categories generated lower risk-adjusted returns than their benchmarks when using net-of-fees returns. On a gross-of-fees basis, only International Small-Cap funds outperformed on a risk-adjusted basis over the 10- and 15-year periods.

When using net-of-fees risk-adjusted returns, the majority of actively managed fixed income funds in most categories underperformed over all three investment horizons. The exceptions were Government Long, Investment Grade Long, and Loan Participation funds (over the 5- and 10-year periods), as well as Investment Grade Short funds (over the 5-year period).

However, unlike their equity counterparts, most fixed income funds outperformed their respective benchmarks gross of fees. This highlights the critical role of fees in fixed income fund performance. In general, more active fixed income managers underperformed over the long term (15 years) than over the intermediate term (5 years).

On a net-of-fee basis, asset-weighted return/volatility ratios for active portfolios were higher than the corresponding equal-weighted ratios, indicating that larger firms have taken on better-compensated risk than smaller ones. On an equal-weighted measure, all domestic equity categories underperformed over all investment horizons, except for Real Estate Funds over the five-year horizon.

However, on an asset-weighted measure, over the five-year period, Real Estate, All Mid-Cap, All Small-Cap, Mid-Cap Growth, and Small-Cap Growth funds outperformed their benchmarks. Large-Cap Value funds was the only category that generated higher asset-weighted return/volatility ratios than the benchmark over the 15-year period.

Most fund categories produced higher return/volatility ratios than their benchmarks, gross of fees, on an equal-weighted basis. However, their outperformance diminished once fees or fund size were accounted for, especially in domestic and international equity funds. In general, equal-weighted return/volatility ratios improved more than the corresponding asset-weighted ratios when fees were ignored, indicating that fees play a more prominent role in smaller funds’ performance.

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Latin America Persistence Scorecard May 2020

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María Sánchez

Associate Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

INTRODUCTION

  • A key dimension of any active versus passive debate is managers' ability to consistently deliver above-average returns over multiple periods. Persistence in performance is one way to differentiate skill from luck.
  • In this report, we measure the performance persistence of active funds in Brazil, Chile, and Mexico that outperformed their peers over consecutive three- and five-year periods. We also analyze how their performance ranking transitioned over subsequent periods.

SUMMARY OF RESULTS

Brazil

  • Exhibit 2 highlights the inability of top-performing equity fund managers to consistently replicate their success in subsequent years - regardless of size focus, by the fourth year, no fund remained in the top quartile.

  • Within fixed income, results in the government bond funds category were similar. However, the corporate bond funds category painted a slightly different picture; while the majority of managers were not able to maintain consistent outperformance for five years in a row, a noticeable 28% them were able to do so.
  • The five-year transition matrix highlights that top-quartile equity (30%), large-cap equity (38%), and government bond (70%) funds that remained active had a higher likelihood of remaining in the top quartile in the second five-year period.
  • Mid- and small-cap equity funds had a high frequency of closures - even for equity funds in the top quartile in the first five-year period, 30% were eventually merged or liquidated in the second five-year period. Thus, overall, a fund had a higher chance of shutting down than of remaining in the top quartile.
  • Top-quartile fund managers focused on corporate bond funds fared particularly poorly, as no manager remained in the top quartile in the second five-year

Chile

  • A minority of Chilean high-performing equity funds (10%) stayed in the top quartile for three consecutive years.
  • Exhibit 2 demonstrates the lack of persistence by equity managers in Chile - just 9% of top-performing funds in the first 12-month period repeated their outperformance in the second period. None of them persisted in the subsequent periods.
  • The five-year transition matrix shows top-quartile managers in the first period that remained live in the second period were more likely to stay in the first quartile or to move to quartile two. However, a significant percentage of funds eventually shut down in the second period, especially the ones in the second and third quartile (50% and 60% respectively).

Mexico

  • No funds in the Mexican equity category managed to stay in the top quartile for three consecutive years.
  • The five-year performance persistence test shows that top-quartile managers had difficulty replicating their outperformance in future years. After one year, just 20% of managers remained in the top quartile, and by year two, that percentage dropped to 10%.
  • Exhibit 5 shows that top-quartile managers in the first five-year period were resilient and survived in the second five-year period, regardless of the quartile they ended in.
  • As observed in the SPIVA® Latin America Year-End 2019 Scorecard, Mexico had a higher rate of survivorship than Brazil and Chile in the five-year period.

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SPIVA® India Year-End 2019

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Arpit Gupta

Senior Analyst, Global Research & Design

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Akash Jain

Associate Director, Global Research & Design

S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active Funds (SPIVA) U.S. Scorecard in 2002. Over the years, we have built on our experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.

The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, we studied the performance of three categories of actively managed equity funds and two categories of actively managed bond funds over the 1-, 3-, 5-, and 10-year periods ending in December 2019.

The divergence between the performance of the Indian Equity Large-Cap and Indian Equity Mid-/Small-Cap fund categories continued into 2019, with the large-cap benchmark, the S&P BSE 100, returning 10.9% and the mid-/small-cap benchmark, the S&P BSE 400 MidSmallCap Index, closing in the red, at -2.1%, during the one-year period ending in December 2019.

Bonds offered strong performance in 2019, aided by the softening of policy rates by the Reserve Bank of India. The S&P BSE India Government Bond Index and the S&P BSE India Bond Index returned 11.10% and 10.84%, respectively, during the one-year period ending in December 2019.

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SPIVA® Japan Year-End 2019

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Arpit Gupta

Senior Analyst, Global Research & Design

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Priscilla Luk

Managing Director, Global Research & Design, APAC

SUMMARY

  • S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the SPIVA U.S. Scorecard in 2002. Over the years, we have built upon our experience by expanding scorecard coverage into Australia, Canada, Europe, India, South Africa, Latin America, and Japan. While this report will not end the debate surrounding active versus passive investing in Japan, we hope to make a meaningful contribution by examining market segments in which one strategy performs better than the other.

  • The SPIVA Japan Scorecard reports on the performance of actively managed Japanese mutual funds against their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, we evaluated returns of more than 741 Japanese large- and mid/small-cap equity funds, along with more than 646 international equity funds investing in global, international, and emerging markets, as well as U.S. equities.

  • Domestic Equity Funds: In 2019, the S&P/TOPIX 150 and the S&P Japan MidSmallCap gained 19.3% and 16.8%, respectively. Over the same period, 42.4% and 74.6% of large- and mid/small-cap equity funds beat their respective benchmarks, with equal-weighted average returns of 19.1% and 21.0%, respectively. The performance of domestic equity funds relative to their benchmark in 2019 was better than in 2018, with more funds outperforming the benchmark.

    Over the 10-year horizon, 30.9% and 45.2% of large- and mid/small-cap funds managed to outperform their benchmarks, while 35.4% and 37.3% of funds were liquidated, respectively. The large-cap funds recorded equal- and asset-weighted average excess returns of 8 bps and -5 bps relative to benchmark, respectively, while the mid/small-cap funds reported excess returns of 2.53% and 0.32% on equal- and asset-weighted bases, respectively. Mid/small-cap funds tended to perform better than large-cap funds in Japan, as compared to their relative benchmark indices.

  • Foreign Equity Funds: In 2019, the relative performance of U.S. and international equity funds against their benchmarks was worse than in 2018, while the relative performance of emerging market equity funds improved. 8% and 67.7% of U.S. and international equity funds underperformed their respective benchmarks, while 56.2% and 56.8% of global and emerging market equity funds did not beat their benchmarks, respectively. For 2019, all foreign equity fund categories reported negative equal-weighted average returns relative to their benchmark indices, ranging from -0.84% (global equity funds) to -5.47% (U.S. equity funds). There was significant divergence between the asset- and equal-weighted average returns in the emerging market fund category, as the asset-weighted return was dominated by a few well-performing large funds.

    Over the 10-year period, the majority of foreign equity funds underperformed their respective benchmarks. More than 90% of global, international, and emerging equity funds underperformed their respective benchmarks on absolute and risk-adjusted bases. U.S. equity funds had the worst benchmark-relative performance, underperforming the benchmark by 5.3% and 6.4% on equal- and asset-weighted bases, respectively. Foreign equity funds had a 10-year survivorship rates of 56.3%, which was slightly lower than the rate for domestic equity funds (63.9%).

SPIVA Japan Year-End 2019 Exhibit 1

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SPIVA® U.S. Year-End 2019

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Berlinda Liu

Director, Global Research & Design

SUMMARY

2019 was a remarkable year for equity markets in the U.S. and around the world. Boosted by an accommodative Fed policy, low unemployment, low inflation, and continued global growth, risk assets across the board did well—all of the benchmarks tracked in the SPIVA U.S. Scorecard had positive returns, with the S&P 500® Value leading the pack at 31.9%.

The Information Technology-heavy and more internationally diversified companies of the S&P 500 pushed the index to its second-highest annual return (31.5%) since 2001 and fourth-highest return in 30 years, rising in 10 of the 12 months. The S&P MidCap 400® (26.2%) and the S&P SmallCap 600® (22.8%) also had strong years.

While these tailwinds helped U.S. equity managers post excellent absolute returns, none of them translated into active managers’ superior performance compared with their benchmarks. For example, 70% of domestic equity funds lagged the S&P Composite 1500® during the one-year period ending Dec. 31, 2019, making for the fourth-worst performance since 2001.

SPIVA U.S. Year-End 2019 Exhibit 1

Large-cap funds made it a clean sweep for the decade—for the 10th consecutive one-year period, the majority (71%) underperformed the S&P 500. Their consistency in failing to outperform when the Fed was on hold (2010-2015), raising interest rates (2015-2018), and cutting rates (2019) deserves special note, with 89% of large-cap funds underperforming the S&P 500 over the past decade.

Mid-cap funds could be excused for some swagger when presenting to investment committees: 68% of mid-cap funds beat the S&P MidCap 400 in 2019, the third consecutive year the majority did so. Similarly, 62% of small-cap funds beat the S&P SmallCap 600. However, the awkward long-term statistic remains that 84% of mid-cap funds and 89% of small-cap funds underperformed over the past 10 years.

The perennial growth versus value debate continues, with the continued pain for value funds particularly pronounced in 2019 and visible across all three market cap segments. A staggering 97% of large-cap value funds lagged the S&P 500 Value in 2019, joined by 65% and 80% of their mid- and small-cap peers underperforming their value benchmarks, respectively. The situation was neatly reversed on the growth side, however, with 67%, 91%, and 86% outperforming the S&P 500 Growth, S&P MidCap 400 Growth, and S&P SmallCap 600 Growth, respectively.

There was little to debate over the full decade though, with scant difference between growth and value funds’ likelihood of underperforming their benchmarks: large cap (90%, 92%), mid cap (78%, 88%), and small cap (82%, 97%) all delivered painful results.

Global equities followed the U.S., with 46 of the 50 countries in the S&P Global BMI up on the year (in USD terms). Emerging market funds had a better go of it, with 64% beating the S&P/IFCI Composite. Only about 40% of global, international, and international small-cap funds beat the S&P Global 1200, S&P International 700, and S&P Developed Ex-U.S. SmallCap, respectively.

Government funds struggled across tenors, with 98%, 69%, and 73% underperforming in the long, intermediate, and short-term buckets, respectively. Government bond funds in general had a miserable decade, as an incredible 99% of long bond funds failed to clear the bar over the past 10 years, along with 80% and 70% of intermediate and short-end bond funds, respectively.

Investment-grade funds had split results: while a mere 5% of long-dated funds outperformed, a healthy 68% and 63% of intermediate- and short-term funds managed to do so, respectively. High-yield funds had little reason to celebrate, with 65% falling short. These results matched their longer-term track records: more than 97% of high yield and investment-grade long funds fell short of their benchmark over the decade, but roughly half of the investment-grade intermediate and short- term funds did outperform.

Elsewhere, solid majorities of municipal debt funds and global income funds outperformed, while MBS and loan participation funds disappointed in 2019.

SPIVA’s report accounting for survivorship bias continues to be a valuable cautionary tale. Fund liquidation numbers across segments regularly reached into the 60% range over a 15-year horizon. In line with 2018, roughly 5% of domestic equity funds disappeared in 2019, with ~40% having been confined to the history books over the past decade. International equity funds posted similar numbers for 2019 and the 2010s, but only ~30% of funds in most fixed income categories were merged or liquidated over the decade.

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