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Active vs Passive Management Scorecard: Active Management Lags

There is a long-standing debate over which is better – active vs passive management styles.  In other words,  investing in actively managed funds that rely on stock picking – or passively managed funds that buy the securities in an index.   Twice a year, Standard & Poor’s issues “S&P Indices Versus Active Funds (SPIVA) Scorecard” – a report comparing the performance of active managers against their passive benchmark indices.

The latest report is as of June 30, 2013.  Over the prior 12-months the three indexes returned 20.60% (S&P 500 Large Cap Index), 25.18% (S&P MidCap 400 Index), and 25.18% (S&P SmallCap 600 Index).

The index gains were not achieved by the majority of actively-managed funds.  S&P’s study reports 59.58% of large-cap funds, 68.88% of mid-cap funds, and 64.27% of small-cap funds underperformed their respective benchmark indices.

The poor performance by active managers isn’t a one-year phenomenon.  It’s a persistent pattern that has continued over both 3-year and 5-year time periods as the chart below shows.

Percent of U.S. Equity Funds Outperformed by Benchmarks

  3-Year   (%)   5-Year   (%)
  All Large Cap Funds   85.95   79.46
  All Mid Cap Funds   85.78   81.98
  All Small Cap Funds   80.19   77.88

International equity fared somewhat better with 66% of funds lagging their benchmark over 5-years.

There were some stand-out poor performers over three years: Large-Cap Growth Funds (92.11% of the funds underperformed their benchmark), Mid-Cap Growth Funds (92.86% of funds underperformed), and Real Estate Funds (95.07% of the funds didn’t beat their benchmark index).

A real bright spot for active-management is in International Small Cap funds.  The vast majority of active managers beat their index in all time periods.

An investment portfolio that straddles the active versus passive management discussion may be one with a ‘passive’ foundation built upon Exchange-Traded Funds or Index Funds, while adding actively managed funds in asset classes one believes may enhance the portfolio’s performance.

To see the S&P Indices Versus Active Funds (SPIVA) Scorecard Mid-Year 2013 report go to http://us.spindices.com/documents/spiva/spiva-us-mid-year-2013.pdf


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