Actively Managed Funds Fail When Needed the Most

Advisors had little use for actively managed funds over the recent bull market; index funds did exceptionally well. But just when those actively managed funds were most needed – over the recent market downturn – they failed to protect investors.

Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) scorecard, which compares the performance of actively managed equity mutual funds to their appropriate index benchmarks. The 2019 report highlights the performance of active funds over the full decade as well as the last 15 years. Following are some of the most significant data points:

  • Over the decade, 89% of large-cap funds, 84% of midcap funds and 89% of small-cap funds underperformed their respective passive benchmarks.
  • Over the decade, the vast majority of both value and growth managers underperformed their respective benchmarks – large cap (90%, 92%), midcap (78%, 88%) and small cap (82%, 97%).
  • Active long-term government bond funds had almost a perfect record, as 99% failed to outperform over the past 10 years – along with 80% and 70% of intermediate and short-end bond funds, respectively.
  • More than 97% of high-yield and investment-grade long funds fell short of their benchmark over the decade, though roughly half of investment-grade intermediate and short-term funds did outperform.
  • Over the 15-year period, on an asset-weighted basis, large-cap funds underperformed by 1.06%, midcap funds by 1.36%, small-cap funds by 0.94% and multi-cap funds by 0.45%. In each market-cap category, both value and growth funds underperformed. In addition, real estate investment trust (REIT) funds underperformed by 1.08%.
  • International results were similar over the 15-year period. Global funds underperformed by 83.2% (0.54% on an asset-weighted basis), international funds by 90.4% (0.52% on an asset-weighted basis), international small funds by 68.4% (0.28% on an asset-weighted basis) and emerging market funds by 90.6% (0.89% on an asset-weighted basis), destroying the myth that active management works in so-called inefficient markets like emerging markets.
  • Over the 15-year period, 98.2% of long-term government bond funds underperformed (by a shocking 3.02%), 89.1% of intermediate-term government bond funds underperformed (by 0.67%), 83.3% of short-term government bond funds underperformed (by 0.65%), an almost perfect 99.2% of high-yield funds underperformed (by 2.1%), 93.8% of mortgage-backed securities (MBS) funds underperformed (by 0.71%), and 93.3% of emerging market bond funds underperformed (by 2.31%). All figures are on an asset-weighted basis.

Highlighting the importance of survivorship bias that appears in many rankings (such as Morningstar’s), fund liquidation numbers across equity segments regularly reached into the 60% range over a 15-year horizon, and 40% were sent to the mutual fund graveyard over the past decade. International equity funds posted similar results. In the fixed income arena, about 30% of funds in most categories were merged or liquidated over the decade.