The latest scorecard on actively managed funds from S&P Dow Jones Indices reveals another key variable that advisors should consider when choosing between actively managed and passively managed mutual funds and ETFs: a fund’s survival rate.
In addition to the fact that few actively managed equity funds outperform their benchmark over the long term, only about 40% survived for 15 years and about 57% survived for 10 years, according to the analysis, know as the SPIVA Scorecard, which is based on data through Dec. 31, 2016. The funds were either liquidated or merged with another fund, usually due to poor performance.
The lesson for advisors: “Know what you’re getting into when you want to pick a fund manager today,” said Ryan Poirier, a senior analyst who, along with managing director Aye Soe, compiled the report. “There’s probably a good chance the fund won’t be around for the long term.”
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Among U.S. equity funds, growth funds are more likely to disappear than value funds and within that broad category large-cap and mid-cap appear to be most vulnerable, though small-cap growth funds didn’t fare much better. Just 27% of large-cap growth funds survived over 15 years while 48% survived over 10 years. In the mid-cap category the comparable figures are 37% and 47% and in small cap 42% and 53%.
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International equity funds and global equity funds (global funds invest in U.S. and foreign equities) fared much better than their U.S. counterparts over the 10-year period, with survival rates just above 60%. Over the 15-year period, however, only 38% of global funds and 43% of international funds survived.
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The survivorship rate among actively managed bond funds, excluding munis, was highest for mortgage-backed securities funds — about 60% over 15 years and 71% for 10 years — and lowest for intermediate government funds — 42% and 58%, respectively. But the number of bond funds analyzed was half the number of equity funds.
The SPIVA Scorecard also compared the aggregate performance of actively managed funds to their benchmarks and included 15-year data for the first time to provide “a complete market cycle to measure the effectiveness of managers across all categories.” The categories are based on the Lipper fund classification system.
Not surprisingly, well less than half of actively managed funds outperformed over the short and long term.
For the year ended Dec. 31, 2016, 40% of all domestic actively managed equity funds outperformed, but the percentages fell after that. Only 8% outperformed over three years, and bewteen 14 and 17% outperformed their benchmarkets over five, 10 and 15 years.
Value funds tended to perform better than growth, and large cap value performed best, but even then the best performance was over 10 years, with only 36% outperforming their benchmark.
Most actively managed international equity funds, including emerging market funds, also underperformed. At best, 33% of international funds outperformed over five years, but the percentage was smaller over shorter and longer time frames. Emerging market funds did best over the one-year time horizon with 36% outpacing their benchmark.
Actively managed bond funds, not surprisingly, outperformed at a much higher rate than equity funds, in certain categories. Between 62% and 80% of intermediate investment grade funds outperformed their benchmarks over 1, 3 and 5 years. The comparable numbers for short-term investment-grade funds were 62% to 73%.
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