Canadian stock markets experienced drastic volatility in the first half of 2020. The S&P/TSX Composite started strong, as January capped a stretch where the index posted positive returns in 7 out of 8 months, subsequently reaching an all-time high on Feb. 20, 2020. As the effects of the COVID-19 pandemic became apparent, the S&P/TSX Composite then fell a dizzying 37.2% in just 22 days, mirroring markets worldwide. A sharp bounce off the lows followed by an uncertain recovery left the index down 7.5% over the first six months of 2020. Smaller-cap names in the S&P/TSX Completion fell 11.8%, lagging the 6.3% decline of the S&P/TSX 60.

Although this volatile period offered ample opportunity for stock-pickers to shine, 88% of Canadian equity funds underperformed their benchmarks over the past year, in line with the 90% that did so over the past decade. This shortfall was not an outlier, as in six of seven categories, a majority of funds fell short of their benchmarks in the past year, and at least two-thirds of funds did so in every category over the past 10 years.

Canadian Equity funds were particularly notable for their level of underperformance. On an asset-weighted basis, Canadian Equity funds returned a dismal 7.9% below the S&P/TSX Composite over the past year, the worst relative performance of any fund category. Canadian Dividend & Income Equity funds provided a rare bright spot for active managers, with 69% outperforming over the past year, while dividend indices considerably lagged the market. In the 12-month period ending June 30, 2020, the broad-market S&P/TSX Composite fell 2.2%, whereas the S&P/TSX Canadian Dividend Aristocrats^® lost 10.8%, the worst performance of any fund category benchmark. Over the 10-year window, this 8.6% deficit flipped to a 0.7% annualized outperformance for the S&P/TSX Canadian Dividend Aristocrats, while active fund managers reverted to form, with just 12% able to surpass the benchmark.

For Canadian Small-/Mid-Cap Equity managers, 52% underperformed the S&P/TSX Completion in the last year. Just 31% of Canadian Small-/Mid-Cap Equity funds beat the index for the decade, which was the most favorable performance of any category observed.

Among Canadian Focused Equity funds, 84% lagged the blended benchmark, which comprises the S&P/TSX Composite (50%), the S&P 500^reg; (CAD) (25%), and the S&P EPAC LargeMidCap (25%). The fund category performed similarly in the SPIVA Canada Year-End 2019 Scorecard, when 85% underperformed the benchmark. Canadian Focused Equity funds were also notable for having the worst chances of beating the index over the past 10 years, with just 4 of 120 funds (3.3%) surpassing the blended target. Asset allocators punished these funds heavily, as only 40% of funds survived the decade, the worst survivorship of any category.

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. The SPIVA Europe Scorecard measures the performance of actively managed European equity funds denominated in euro (EUR), British pound sterling (GBP), and other European local currencies against the performance of their respective S&P DJI benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.

MID-YEAR 2020 HIGHLIGHTS

As the S&P Europe 350® experienced its highest levels of volatility since the 2008 financial crisis and the largest single-month drawdown in almost 20 years, the widely held belief that market volatility should create widespread opportunities for active managers remained unproven.

• Over the first six months of 2020, 42% of active euro-denominated Europe Equity funds underperformed the S&P Europe 350. This figure rose to 49% over 12 months and 87% over 10 years.
• As the S&P Europe 350 recovered modestly in the second quarter of the year to return -12.4% over six months, the average asset-weighted fund return in the category was -10.6% over the same period. On the same basis, the 25th percentile fund returned -14.9%.
• The interquartile range of equity funds performance, the difference between the 75th and 25th percentile funds, revealed a high dispersion of equity fund performance across the board. Taking Europe as an example, the six-month range was 8.13%, while the 10-year long-term range was 3.15%, highlighting that in highly volatile markets, fund performance also varied considerably.
• Few active fund categories showed immunity to the widespread market conditions. Of the 23 fund categories, 19 displayed negative returns on an asset-weighted basis for the six-month period.
• Despite significant drawdowns seen across the majority of active equity funds, there was no noticeable change in fund survivorship compared with the prior year. Of the active euro-denominated Europe Equity funds, 98% survived the six-month period. Interestingly, only 51% of funds in the same category survived the 10-year period.

Size Mattered in the U.K.

• The U.K. Equity category saw some notable differences over the first six months of the year. U.K. Small-Cap fund managers had far greater success at beating the benchmark than U.K. Large-/Mid-Cap Equity funds, as 78% and 48% outperformed their benchmarks, respectively.
• The S&P United Kingdom LargeMidCap returned 0.5% more than U.K. Large-/Mid-Cap Equity funds over the six-month period. In comparison, the S&P United Kingdom SmallCap lagged the U.K. Small-Cap Equity funds by 8% over the same period when measured on an asset-weighted basis.

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 on our 18 years of experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.
• The SPIVA Australia Scorecard reports on the performance of Australian active funds against their respective benchmark indices over different time periods. In this scorecard, we evaluated returns of over 910 Australian equity funds (large, mid, and small cap, as well as A-REIT), 463 international equity funds, and 116 Australian bond funds.
• Market sell-offs were seen in different Australian equity market segments in the first half of 2020 due to the COVID-19 pandemic, while Australian bonds recorded a small gain. Apart from A-REIT funds, the majority of funds in all categories suffered worse drawdowns versus their respective benchmark indices.
• All fund categories recorded smaller average returns than their respective benchmark indices in the first half of 2020 on both equal- and asset-weighted bases. The same was observed for the 10- and15-year periods, except for the Australian Equity Mid- and Small-Cap category.

• Australian Equity General Funds: The S&P/ASX 200 lost 10.42% in the first half of 2020, while Australian Equity General funds recorded worse drawdowns of 11.66% and 11.39% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending June 2020, 64.16% and 57.14% of funds in this category underperformed the benchmark, respectively.  Over the 10- and 15-year horizons, less than 20% of funds managed to survive and deliver higher returns than the benchmark.
• Australian Equity Mid- and Small-Cap Funds: The S&P/ASX Mid-Small dropped 6.86% in the first six months of 2020, while the Australian Equity Mid- and Small-Cap funds recorded a bigger loss. Average fund return on an equal-weighted basis was worse than that based on an asset-weighted basis, indicating that funds with smaller assets tended to suffer more losses, which was inconsistent with observations over longer periods.  Over the 6- and 12-month periods ending June 2020, 55.64% and 49.61% of funds in this category did not outperform the benchmark, respectively.
• International Equity General Funds: The international equity market suffered a smaller loss than the Australian equity market in the first half of 2020. The S&P Developed Ex-Australia LargeMidCap lost 3.20%, while International Equity General funds marked an equal-weighted average return of -3.88%, with 60.37% of funds underperforming the benchmark.  Over the 10- and 15-year periods, more than 90% of funds underperformed the S&P Developed Ex-Australia LargeMidCap.
• Australian Bond Funds: The S&P/ASX Australian Fixed Interest 0+ Index recorded a gain of 3.59% in the first half of 2020, while Australian Bonds funds recorded smaller gains of 2.94% and 2.87% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending June 2020, 73.13% and 68.12% of funds in this category underperformed the benchmark. 
• Australian Equity A-REIT Funds: The S&P/ASX 200 A-REIT suffered a severe loss of 21.29% in the six-month period ending June 2020, while the Australian Equity A-REIT funds lost 22.06% and 22.21% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending June 2020, 44.78% of funds in this category underperformed the benchmark, though a much higher portion of funds failed to beat the benchmark over longer periods.
• Fund Survivorship: In spite of the COVID-19 pandemic, we did not see higher fund liquidation rates across all fund categories in the 12-month period ending June 2020, compared with previous scorecards. Of all Australian funds measured, 2.67% were merged or liquidated, with Australian Bond funds recording the highest liquidation rate of 4.35%.  In contrast, only 1.49% of Australian Equity A-REIT funds failed to survive.  Over longer horizons, only 78.85%, 63.09%, and 51.82% of funds across all categories survived the 5-, 10-, and 15-year periods, respectively.

SUMMARY

Drastic volatility hit the U.S. stock market in the first half of 2020. The S&P 500^® declined by 3.1%, with negative returns also posted by the S&P MidCap 400^® (-12.8%) and the S&P SmallCap 600^® (-17.9%).

The S&P 500 reached an all-time high on Feb. 19, 2020, followed by a rapid 33.8% drop through March 23, 2020, as pandemic-driven restrictions suppressed economic activity. In April, stocks rebounded and the S&P 500 posted its best monthly return since January 1987. Encouraged by government stimulus programs and the expectation of economic reopening, the stock market continued its recovery in May and June.

In 11 out of the 18 categories of domestic equity funds, the majority of funds continued to underperform their benchmarks. For example, 67% of domestic equity funds lagged the S&P Composite 1500^® during the one-year period ending June 30, 2020. Additionally, the majority of large-cap (63%) and multi-cap (65%) funds lagged their benchmarks. In contrast, mid-cap and small-cap active funds performed relatively better. Approximately 56% of mid-cap and 53% of small-cap active managers outperformed their benchmarks for the one-year period (see Exhibit 1).

Growth funds led across all capitalization segments in the one-year period; 74% of large-cap growth, 83% of mid-cap growth, and 89% of small-cap growth funds beat their benchmarks. However, their recent success was not enough to offset previous underperformance; 92% of large-cap growth, 74% of mid-cap growth, and 75% of small-cap growth funds underperformed over the past 15 years.

Value funds continued to lag their benchmarks over all time horizons; 73% of large-cap value, 59% of small-cap value, and 91% of multi-cap value funds underperformed their benchmarks over the past year. Mid-cap value funds were the only exception, with 62% outperforming the S&P MidCap 400 Value for the one-year period. For all investment horizons longer than three years, however, more than two-thirds of value funds across all capitalization segments underperformed their benchmarks.

Despite divergent results over the one-year horizon, both growth and value funds underperformed their benchmarks over the past decade. Large-cap (growth 82%, value 86%), mid-cap (60%, 81%), and small-cap (57%, 90%) all delivered painful results.

SUMMARY

The SPIVA Institutional Scorecard extends the S&P Indices Versus Active (SPIVA) U.S. Scorecard to consider institutional accounts in addition to the mutual funds.  We also examine the impact of fees on both account types.

Overall, underperformance among institutional equity accounts was not meaningfully different from that reported for mutual funds.  For example, 79% of large-cap institutional accounts and 82% of large-cap mutual fund managers underperformed the S&P 500^® on a gross-of-fees basis over the past 10 years.  Net-of-fees, underperformance by both fund types increased by approximately 7% (see Exhibit 1).

Gross-of fees, institutional accounts had a better chance of outperforming their benchmarks than their mutual fund counterparts in 16 of the 17 domestic equity fund categories tracked.  Nonetheless, the majority of institutional accounts across all equity fund categories underperformed over the past 10 years, ranging from a high of 87% of multi-cap core funds to a low of 59% of mid-cap growth funds.

Among mutual funds, active international equity managers showed greater differences between the gross- and net-of-fees relative performance figures than their domestic fund peers.  No such notable difference between categories was observed among institutional equity accounts.

Institutional fixed income funds typically performed better than their benchmarks, gross-of-fees, compared with their mutual fund counterparts.

For fixed income funds, fees had the greatest impact on performance in the emerging markets debt space.  While 37% of institutional emerging markets hard currency funds failed to outperform the benchmark over the past 10 years gross-of-fees, 68% did so net-of-fees.  On the mutual fund side, however, the impact of fees was even higher.  Emerging markets debt funds suffered a change of 43 percentage points, from 57% underperforming the benchmark gross-of-fees to a full 100% of funds once fees were taken into account.

Focusing on just 2019, outperformance statistics of institutional accounts varied by market-cap segments, perhaps due to spreads in the benchmark returns.  While 63% of large-cap funds fell short of the S&P 500’s 31.5% return, only 29% and 31% of the mid-cap and small-cap funds underperformed the S&P MidCap 400^® (26.2%) and S&P SmallCap 600^® (22.8%), respectively, perhaps reflecting fund managers' proclivity for hidden style drift.

Mid-cap growth funds offered the best relative performance among equity categories in 2019; an impressive 85% outclassed the S&P MidCap 400 Growth’s 26.3% gain.

The majority of institutional international equity fund managers underperformed in all four categories tracked over the past 10 years, although 64% of emerging markets funds did surpass the S&P/IFCI Composite in 2019.

Performance by institutional fixed income managers relative to their benchmarks over the past decade was mixed, as the majority of funds beat their benchmarks in 9 out of 17 categories.  However, they had a relatively strong 2019, with the majority of funds outperforming in 13 of 17 categories.

Emerging markets local currency funds were the best category for outperformance, with 88% topping the benchmark in 2019.  However, their impressive 2019 performance did not make up for an otherwise miserable decade, over which just 16% of funds outperformed, the worst of any fixed income category.  Municipal funds had the worst showing of 2019, with 72% of managers failing to match the S&P National AMT-Free Municipal Bond Index.