In this report, we add institutional accounts to the mutual funds analyzed in the S&P Indices Versus Active (SPIVA) U.S. Scorecard. We aim to provide the institutional community with the ability to judge managers' true skill without the possible distortions that fees may create on performance comparisons. We also examine the impact of fees on both account types and illustrate the similarities and differences between the performances of open-end funds and segregated institutional accounts across categories.
Over the long term and gross-of-fees, underperformance among institutional domestic equity accounts was not meaningfully different from that of mutual funds. For example, 78% of both large-cap institutional accounts and large-cap mutual fund managers underperformed the S&P 500® over the 10-year period ending Dec. 31, 2021. After deducting fees (see section "About the SPIVA Institutional Scorecard"), there was a similarly small distinction between their underperformance rates, which both increased to 83% (see Exhibit 1).
Overall, 2021 continued to witness better performance from institutional accounts than from mutual funds, with lower 10-year underperformance rates (gross-of-fees) in 17 of the 21 reported equity segments. Nonetheless, in 16 out of 17 domestic equity fund categories, and in 3 out of 4 international equity categories, a majority of institutional accounts underperformed over a 10-year period. Underperformance rates ranged from 81% of large-cap core accounts to 46% of international small-cap equity accounts.
Volatility remained muted in 2021 in comparison to the pandemic-induced turmoil of 2020, but there were still opportunities for active managers to add value through security, sector and style selection during the year, as well as a moderate tailwind from equal weighting (rather than capitalization weighting) in large-cap U.S. equities. These two facts suggest conditions were not unfavorable for actively managed equity portfolios in 2021.
Several other details illustrate the opportunity set: most infamously, unprecedented price disconnections arose in widely-publicized "meme stocks," the extremes of which accompanied an all-time high in stock-level dispersion within the S&P SmallCap 600® in January 2021. But the opportunities for outperformance were not limited to smaller stocks, or just U.S. equities, with above-average dispersion observed across U.S. and global equity benchmarks during 2021. There were cross-geographic opportunities, too, as the S&P 500 completed its third consecutive year of double-digit gains, rising 29%, while the S&P/IFCI Composite gained less than 1% and the large-cap developed S&P International 700 rose 10% (see Reports 3 and 9). These returns created a tailwind for internationally benchmarked funds tempted by domestic allocations but a more challenging environment for domestic funds shopping abroad. Meanwhile, the S&P 500 Equal Weight Index outperformed the S&P 500 by 1% over the year, indicating that weighting by market capitalization may have been—all else equal—slightly disadvantageous.
Of course, since we cannot all be above average, the potential for above-average performance requires a possibility for below-average performance. Offering confirmation that 2021's markets were bristling with opportunities for active managers to fall behind, in 14 out of 17 domestic U.S. equity categories, a majority of institutional accounts underperformed, gross-of-fees, in 2021 (see Report 1). Chief among those categories was the large-cap U.S. growth category, within which 94% of actively managed institutional accounts underperformed the S&P 500 Growth, gross-of-fees. Conversely, the large-cap U.S. value category was a notable exception to the rule, where a creditable 26% underperformance rate was observed. The combination of the two statistics suggests that, in both categories, active managers may have been systematically allocating across the growth/value divide.
As might be expected given the international benchmarks' returns, much lower underperformance rates were observed in the international equity categories, including underperformance rates of 25% and 28%, respectively, in the international and international small-cap categories (see Report 6).
Conversely, in 12 of 17 reported fixed income categories, a majority of actively managed institutional accounts outperformed, gross-of-fees, in 2021 (see Report 11). While the outperformance rate generally decreased in every category over longer time horizons, a majority also outperformed in 9 out of the 17 categories over a 10-year horizon. There were nonetheless some pockets in which outperformance was harder to find: intriguingly, given the surge in domestic inflation that has rocked the U.S. fixed income markets in the first half of 2022, more than two-thirds of institutional accounts in the U.S. inflation-linked category underperformed in 2021, with a similar proportion underperforming over the past decade.