Mon, May 04, 2009
Standard and Poor’s: Active Managers Didn’t Outperform in This Bear Market
There’s a continuing debate over the question of whether active mutual fund management (funds that buy in and out of the market, looking for stocks that managers believe will outperform the market) is capable of consistently beating passive management (buy stock indexes). Standard and Poor’s Index Services recently weighed in with its latest assessment on this question.
Standard and Poor’s, one of the leading providers of credit ratings, investment indices, and other financial market data, generates an analysis that it calls the SPIVA Scorecard (Standard & Poor’s Index Versus Active). The SPIVA fund analysis provides an apples-to-apples comparison of active fund managers with appropriate benchmark indices. In recent months, I’ve continued to hear and read claims that in periods like this, active managers shine, because they know which stocks to avoid and can even move to cash if stocks are going south. An index fund, on the other hand, is blind to this information and remains fully invested all the time.
According to the most recent SPIVA analysis, the traditional belief that active fund management provides an important advantage over passive funds during bear markets – which has a certain intuitive appeal – didn’t hold up to scrutiny over the five-year period from the beginning of 2004 to the end of 2008. During that time the S&P 500 index clocked an 18.5% loss. As bad as that was, 71.9% of actively-managed large-company stock funds did worse. 75.9% of active mid-cap funds were bested by the S&P Mid-Cap 400 index, and the S&P SmallCap 600 beat a whopping 85.5% of small-cap stock fund managers.
The results for bond funds were equally dismal for active managers, as their respective indices outperformed a majority of actively managed fixed income funds in all categories over the same five-year period.
Srikant Dash, S&P’s Global Head of Research & Design, stated in the firm’s press release that, “The belief that bear markets strongly favor active management is a myth. A majority of active funds in each of the nine domestic equity style boxes were outperformed by indices during the down markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.” Of course, as a major licensor of market indices, S&P might be considered biased on this issue. I’m sure that a clutch of active mutual fund managers will point that out in their rebuttals to S&P’s analysis.
I recently read Nassim Nicholas Taleb’s Fooled by Randomness, and he discusses at length the fact that money managers can maintain the appearance of outperformance for years even if their results are just the outcome of randomness. When I get time, I’ll share some of the insights from the book.