Features Defying SPIVA
Three ways active managers may defy the laws of SPIVA
Does the data tell the full story of the active-passive debate ?
By Jamie Gordon
& P Dow Jones Indices ’ SPIVA has become the self-proclaimed “ de facto scorekeeper of the active versus passive debate ” but regularly leaves active managers ’ eyes in a permanent rolling state by underlining the conclusion that resisting the power of passive is a futile business .
Last year ’ s SPIVA Europe Scorecard painted a grim picture for the long-term effectiveness of active management , finding 95 % of US equity funds , 75 % of Europe equity funds and 62 % of Europe equity funds were beaten by corresponding S & P DJI benchmarks over the trailing 10-year period .
Factored into these figures are vast swathes of product closures , with almost half of all global , US , Europe and UK equity funds closing over the decade to the end of 2021 . But do these headline-grabbing stats obscure a recipe for active success ?
Aversion to being average
No doubt the adage that it is virtually impossible to beat the market , net of fees , is one that makes some managers ’ blood boil – not least because this argument is often supported by quoting performance data that equal weights the performance of entire fund categories versus a benchmark .
Simon Evan-Cook , fund manager at Downing , argued this way of examining returns creates a false impression of the value added or destroyed by active managers . “ Most fund sectors are dominated by a few behemoths ,” he said .
“ These funds have a far greater impact on investors ’ wealth than the ‘ average fund ’, the calculation of which assumes all funds are evenly sized . Therefore , to gauge whether fund holders are collectively ‘ beating the market ’, we should take fund size into account by using weighted averages .”
He added the difference between equal-weighting and asset-weighting the performance of an entire fund class is one provides a statistical mean average while the other shows the average performance experienced by a fund holder – which is more practical .
The impact this has on fund performance averages is material , with sterling-denominated global equity fund returns being 1.2 % higher on an annualised basis over the past decade when done on an asset-weighted rather than equal-weighted basis .
However , there a few notable caveats . Chief among them is the asset-weighted global equity fund category still underperformed the S & P Global 1200 index by 1.2 % a year over the 10-year period . The same trend rung true across US , Europe and emerging market fund exposures .
A second consideration is the challenge of identifying which large fund will outperform and whether it can replicate its past form . The 2023 SPIVA scorecard found in five out of six fund categories , not a single manager in the top quartile of performers in 2018 was able to remain in the top quartile for the following four years .
In 2012 , one manager ’ s three funds accounted for 3.3 % of the UK Equity Income sector on an equal-weighted basis but 40 % of the sector on an asset-weighted basis . The manager in question was the infamous Neil Woodford .
“ Rather than taking a top-down view of the active versus passive , another counter to the index-tracking argument might be to isolate exposures where active managers maintain a consistent edge ”
Mini but mighty
Rather than taking a top-down view of the active versus passive , another counter to the index-tracking argument might be to isolate exposures where active managers maintain a
24 ETF INSIDER | JUNE 2023