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Portfolio > Mutual Funds > Equity Funds

Passive Beats Active in ’15: Report

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Last year was tough for the equity market thanks to falling oil prices, a strengthening U.S. dollar and other factors. The S&P 500 had a total return of nearly 1.4% in 2015 vs. 1.0% for the S&P Composite 1500.

But how did the active mutual funds fare? That’s what the S&P Dow Jones Indices’ research looks at every six months, when it posts its S&P Indexes Versus Active Research, or SPIVA, U.S. Scorecard.

Last year, for instance, 66.1% of large-cap managers, 56.8% of mid-cap managers and 72.2% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively, according to S&P’s latest research.

“The figures are equally unfavorable when viewed over longer-term investment horizons,” stated Aye M. Soe, senior director of global research and design for S&P in the study. Over the five-year period, some 84.2% of large-cap managers, 76.7% of mid-cap managers, and 90.1% of small-cap managers performed failed to keep up with their respective benchmarks.

Over the 10-year investment horizon, the results were similar: 82.1% of large-cap managers, 87.6% of mid-cap managers, and 88.4% of small-cap managers were unable to outperform their passive benchmarks on a relative basis.

S&P’s latest study also reveals the funds “disappear at a meaningful rate.” Nearly 23% of domestic equity funds, 22% of global/international equity funds and 17% of fixed income funds were merged or liquidated over the past five years. This finding, the group says, highlights the importance “of addressing survivorship bias in mutual fund analysis.”

In 2015, market conditions tended to favor growth-style investing. Yet, most actively managed value funds in the mid- and small-cap categories outdid their benchmarks. S&P also finds that growth funds underperformed their benchmarks.

As for international equities and emerging market equities, these indices had negative returns in the second half of 2015, largely due to concerns over China’s economic slowdown.

“During the same period, the majority of actively managed funds invested in international developed and emerging markets outperformed their respective benchmarks,” said Soe in S&P’s latest SPIVA report. Over the 10-year period, though, managers across all international equity categories underperformed their benchmarks.

Fixed Income

Fixed-income results reflected the Fed’s move to raise the target federal funds rate by 0.25% in December. The research firm notes the following:

  • Funds invested in short-term and intermediate government and investment-grade corporate bonds significantly underperformed benchmarks on a relative basis last year.

  • Yet most actively managed funds invested in long-dated government and credit categories outperformed their respective benchmarks, which marked a sharp reversal of fortunes from six months earlier.

  • The collapse of the energy market negatively affected the junk bond market, with all headline high-yield indices posting negative returns. During the volatile period, roughly two-thirds of actively managed high-yield funds beat the benchmark.

  • The high-yield bond market is generally considered to be best accessed via active investing, since passive vehicles have structural constraints that can limit their flexibility and ability to deal with credit risk. Still, research finds that over 90% of actively managed high-yield funds underperformed the broad-based benchmark over the past 10 years.

  • Weakness in the high-yield bond market had an impact on the leveraged loan space. The S&P/LSTA U.S. Leveraged Loan 100 Index was done close to 2.8% for the year. Actively managed senior loan funds fared favorably, however, just slightly more than 13% of funds underperforming the benchmark. Similarly, over the five-year time horizon, some 42% of these funds lagged the benchmark.

S&P began publishing its SPIVA U.S. Scorecards 14 years ago. “For more than a decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs,” explained Soe.


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