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Standard & Poor’s released their latest SPIVA® Scorecard and it continues to make active management look bad, which adds fuel to the fire in the debate of active vs. passive. This time around, the study added the 10-year numbers making an even more compelling case against active management, not only in performance but also in the frequently overlooked Style Consistency.
 
 
Here is a link to the entire Scorecard and below are some of the highlights from the report.
 
SPIVA® U.S. Year-End 2014
 
Does adding a longer time frame make a difference in the performance numbers?
 

  • The study added 10-year numbers which confirm the point that beating the benchmark consistently over the long term is a difficult task.
  • Even with three straight years of double digit gains from the S&P 500, domestic funds still struggle to outperform the benchmark.
  • There isn’t one asset class in the US or International space that the study measures where the majority of active managers could outperform their benchmarks over 10 years.

 
How does Style Consistency fare over the 10-year period?
 

  • The Brinson, Singer, Beebower study1 determined that asset allocation is paramount — accounting for over 91% of the variation in portfolio returns.
  • Only 34% of all domestic US funds and 55% of global funds maintained consistency in their style over 10 years.
  • With lack of style consistency in active management, the Small Value portfolio you thought you were invested in could become a Large Growth portfolio and muddle your original asset allocation.

 
Can active managers exploit “inefficiencies” in the market?
 
Some make the case that active managers can be used to exploit “inefficiencies” in the Small Cap or Emerging Markets asset classes, so let’s examine the results:
 

  • Over three, five, and 10-year periods, the US Small Cap Core category failed to beat the benchmark over 80% of the time.
  • Emerging Market managers failed to beat their benchmarks almost 90% of the time.

 
These results don’t surprise us! Time and time again, the SPIVA® Scorecard tells the same story. The average active managers have not consistently beat their benchmarks and have strayed from their designated styles. When it comes to the case against active management, the numbers say it all:
 
If you are using active management, what are you trying to accomplish?
 
Past performance does not guarantee future results.
 
Implementing a passive investing strategy cannot guarantee a gain or protect against a loss.

 
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1Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, Determinants of Portfolio Performance II: An Update, The Financial Analysts Journal, 47, 3 (1991)