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Oct 07

SPIVA Report…strong evidence supporting active management in small caps…not much else

My favourite simple performance report on active management came out today on the Australian market…it can be downloaded by clicking here. Unfortunately active management for the broad asset classes once again came up looking poor with an overwhelming proportion failing to outperform broad indices for Australian Shares, International Shares, Australian REITs, and Australian Bonds. An enormous proportion of active managers were successful in outperforming their Small Cap Australian shares benchmark thus providing some support for the widely held belief that markets are a little less efficient in small cap land.

Anyway, if you don’t want to download the report the result I’m talking to just look at Table 1 below….

Table 1 – Percentage of Funds Outperformed by the Index

SPIVA Australia Results - June 2014Source: SPIVA Australia Scorecard – Mid June 2014

This report is one of my favourites because it takes survivorship bias into consideration…it does this by only surveying funds that were around at the start of the survey period, as opposed to those at the end of the period (which obviously leaves only the good ones). Its also worth pointing out that this is a survey of retail unit trusts so they clearly come with higher fees but lets face it, access to wholesale funds for almost everyone still has platform fees on top.

Of course retail index managers still may cost up to 90bps in these various categories (which is quite appalling in my humble opinion) and they are guaranteed to underperform so its not necessarily as compelling a case for index funds as it appears…but those 3 and 5 year numbers are pretty bad (except for small cap).

 

 

 

 

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1 comment

  1. Aaron

    Michael
    I think that you latter point is more accurate here than the headline.
    The problem with fees, as has been pointed out in a lot of FSI submissions is that the retail fund fees include costs such as administration and advice.
    This makes the SPIVA comparison to an investment return misleading. At the retail level, the SPIVA score for passive management is lower than that for active management, namely (as you note) 100% of passive funds are outperformed by the index.
    I have previously looked at some long term numbers for Australian equities, adjusted for survivorship and the outperformance pre-fees of the median was in the order of 1.5%pa. After full retail fees of circa 2% this was negative, but if you only took the investment costs out, the active performance was pretty good. (at least historically)
    The SPIVA report doesn’t really make a valid active/ passive comparison but it does create great headlines.

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