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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  1. BB

    Always an interesting report, but should I ever meet the creators I would have the following to add
    1. It would be nice to see the same report more comprehensively dissected and presented. Lumping funds together based solely on the asset class they reside/invest in is far more useful for news makers than for investors. Surely S&P can muster a report based on risk exposures or true investment style as opposed to asset class??
    2. There is a very narrow focus of investment styles covered here, large cap growth & value?? To be honest I don’t need a regular report to tell me that the majority of funds that are structured to operate as closet index funds wont outperform the index, that’s pretty straight forward and 100% predictable. Where are your high conviction, concentrated, long/short, market neutral & absolute return funds? A long term or rolling period, survival bias adjusted assessment of those strategies against regular funds and benchmarks makes for interesting, far less predictable and potentially useful research!
    3. Return, return, return, where’s a risk adjusted comparison of performance? downside volatility, max draw downs vs. a benchmark? Underperforming the markets gross period return might not be so bad if the fund did so with half the volatility or half the experienced draw downs of the market?
    4. Give us rolling return data? sure its much more data but a pretty graph will do the trick, and at least we wont be drawing any conclusions from lumpy, return/volatility smoothing period return data.

    and there is my 4 cents.

    1. mjfurey

      Some really great points there BB. My simple comments are… 1. If your investment universe is, for example, the ASX300 then that is your benchmark. Period. Doesn’t matter whether you have an absolute return focus, concentrated strategy or even a style bias. I say that because the ASX300 is the closest representation of “the market” and all of these styles and strategies are simply the managers chosen approach for creating alpha. 2. The applicable Morningstar categories do actually include concentrated or high conviction strategies in their specific categories. Long/short is a separate category and that may be fair enough depending on the market exposure. 3. I agree that risk-adjusted returns makes far more sense but this report is still a step in the right direction and much easier to communicate to the layman. 4. 5 years is actually a pretty short timeframe to draw too many conclusions from monthly data so I’d like to see a much longer timeframe before considering rolling returns in this exercise (3 year/36 month rolling averages are the go…I just feel more comfortable with a sample size greater than 30)

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