Posts filed under “Apprenticed Investor”
Twice a year, S&P releases a “SPIVA Scorecard” – a report comparing the performance of Active Managers versus three passive indices. The S&P 500 large caps, S&P MidCap 400, and S&P SmallCap 600 are pitted against the median returns of active managers.
In the most recent report, the trailing 12 months returns for these indices were 20.60%, 25.18% and 25.18%, respectively (latest data is as of June 30, 2013).
Gains in major the indices were not duplicated by the universe of actively-managed funds. As is typical, most active managers underperformed their respective benchmarks. S&P notes that “59.58% of large-cap funds, 68.88% of mid-cap funds and 64.27% of small-cap funds underperformed their respective benchmark indices” over the trailing 12 months. Performance of active managers were equally unfavorable over three- and five- year periods. Most International equity did no better.
The three-year data is especially damning: In the universe of “All Domestic Equity Funds,” 78.90 percent were outperformed by the S&P Composite 1500. Active managers did better over five years, with 72.14 percent being outperformed.
Three kinds of funds did especially poorly over three years: Large-Cap Growth Funds (active outperformed by passive in 92.11 percent of the funds), Mid-Cap Growth Funds (passive outperformed 92.86 percent) and Real Estate Funds (a whopping 95.07 percent outperformance).
The one notable bright spot among active managers: Emerging markets small-cap funds. They have outperformed for a number of years. That suggests that managers can find Alpha by fishing in waters where there are fewer commercial vessels with trawling nets at work.
The SPIVA Scorecard tends to show much worse performance than other active versus passive studies. My knee-jerk inclination was to assume S&P, a purveyor of passive indexes, was biased. However, a closer look at their statistical work shows they are correcting for biases that typical comparisons omit.
The biggest correction appears to be for Survivorship bias. S&P corrects for those funds that were liquidated (or merged) over the course of a year. Studies that fail to account for funds that close will boost the apparent returns of the set of active managers. Accounting for the entire set of active managers — not just those that succeed and survive — eliminates survivorship bias.
The data strongly shows the advantages of passive indexing. Where many people misinterpret it is in assuming that it means there is no role of active management. That’s the wrong interpretation. There is a place in portfolios for active managers — but it’s probably a smaller slice of holdings than many investors have currently.
S&P Indices Versus Active Funds (SPIVA) Scorecard Mid-Year 2013
My Sunday Washington Post Business Section column is out. This morning, we look at the best ways to Use the News. As I noted last time out, its helpful to reduce your noise levels when it comes to investing. This go round the focus on getting more signal. For a change, I am…Read More
Reduce the noise levels in your investment process Barry Ritholtz November 1, 2013 “Signal-to-noise ratio” is an engineering concept that focuses on the amount of useful information being received compared with false or useless data. This is an especially important concept to investors. Over the past few years, I have been reducing the…Read More
We all know that the U.S. has a looming retirement crisis. The baby boomers do not save enough for their golden years. Social Security is funded at levels that are less than ideal. Private savings in the form of Individual Retirement Accounts and tax-qualified plans like 401(k)’s also appear to be insufficient. One of the…Read More
Well now, let’s have a look around here. Hmmm, nicely typeset. Headline, URL, date are in the usual places; sidebar for other articles off to the right. Hey, this doesn’t look very different than it did at my blog, the Big Picture. What’s different? Oh, you out there. I see, you are a somewhat different…Read More
Category: Apprenticed Investor
> My Sunday Washington Post Business Section column is out. This morning, we look at “noise” levels, and what you can do to reduce them. Here’s an excerpt from the column, that asks: Do these inputs add to signal or to noise? • News: Most of it is actually old. By the time information…Read More
Category: Apprenticed Investor
How Shiller helped Fama win the Nobel Barry Ritholtz, Washington Post October 20 2013 At the University of Chicago, there are two professors of economics named Eugene Fama. The first — let’s call him Fama the Younger — started in the 1960s. He developed a profound insight about the markets. This Fama observed that…Read More
My Sunday Washington Post Business Section column is out. This morning, I look at how Eugene Fama’s early insights were nearly eclipsed by his latter bad theories. Not to give away the ending, but if it weren’t for Robert Shiller’s criticism, Fama may very well not have won. Here’s an excerpt from the…Read More
I am working on this week’s WaPo column, based loosely on last week’s open thread on the value of the Financial Media. I have a 23 bullet points I am trying to cut down to a dozen or less. Here are two: Too Much Noise, Too Little Signal: The biggest problem most investors encounter is…Read More
On Investing: The Obamacare portfolio By Barry Ritholtz, October 6, 10:11 AM Investors are best off when they leave their party affiliation and partisan views behind. I’ve said it before: “Washington, I’m here to tell you, politics and investing don’t mix. Your politics are killing you in the markets.” Keeping your emotions…Read More