Mar 16

SPIVA Report – Active Managers Bad Year

My favourite investmnent returns report was released yesterday by Standard and Poors, their SPIVA Report. Its my favourite because unlike other investment return analysis/reports, this report takes into consideration investment fund survivorship. As many of us know, when an investment fund continues to underperform it typically closes never to be seen again and the reports we see on investmnet manager performance end up being a biased report of winners (e.g. Morningstar and Mercers) as these closed funds are ignored.

Anyway, the whole SPIVA report can be found here but the main results are really just the following table…

As the table shows, with the exception of A-REITs, most active managers failed to beat the main broad-based indices over the 2010 calendar year. For the 5 years to the end of 2010, only small cap Australian equity managers appear to be worth spending the additional fees on with 71% of them outperforming the Small Ordinaries index. With the massive focus on the large-cap end of the market, it makes intuitive sense that an active manager has its best chance of outperforming a small cap index in this less efficient part of the market.

With such a high proportion of global and local managers failing to beat the benchmark for both equities and bonds, active management remains a tough sell. Whilst A-REIT managers had a good year last year, when you consider that 70% of that market is made up of just 7 companies (Westfield Group, Stockland, Westfield Retail, GPT, CFS Retail, and Mirvac) and yet there are dozens of analysts looking at these companies, it is very difficult to justify active management for this overly concentrated asset class irrespective of last year’s results.

Active managers will always have a place, as passive managers can’t exist without them, but their job is really cut out for them as they struggle to justify their fees for weak performance in this increasingly difficult investing environment.

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