Active Investing: 2014 Report Card

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Standard & Poor’s recently released their semi-annual SPIVA Scorecard, which reports on results for actively managed funds, which includes all funds that rely on market timing, stock selection and sector rotation. The full year 2014 results are, as expected, bad. Unexpectedly, they are really, really bad.

U.S. Stock Funds: More than 87% of all domestic equity funds trailed their benchmarks. Of the 13 sub-categories (large cap, small cap, growth, etc.) a total of zero beat their benchmark. Zero. Two of the worst categories were large cap growth funds, which failed 96% of the time, and small-cap funds, which lagged more than 94% of the time.

International Stocks: By comparison, international and emerging market fund managers did a great job. They only failed 69% of the time. Overall, global funds had a failure rate of 77%. Yes, I’m really stretching the definition of “great job.”

Bonds: There was actually a little bit of good news for the active management world in the bond sector. Of the 14 sub-categories tracked by S&P, only nine trailed their benchmarks. But the failures were breathtaking. Investment grade long funds; 98.3% and government long funds: 97.7%.

Other Time Periods: The news was also miserable for three-, five- and ten-year performance. In U.S. funds, no sub-category beat the benchmark more than 50% of the time in any timeframe, and overall they could manage no better than a 77% failure rate. International performance also had little success, although three- and five-year performance for small cap funds succeeded right around half the time. Bond funds did okay in the shorter periods but by ten years, 11 of 13 subcategories failed. Statisticians refer to this as “regression to the mean,” a fancy way of saying you can get lucky in the short run but eventually your luck runs out.

Another damning conclusion from the Scorecard is that it wasn’t solely attributable to the higher fees associated with active investing. At least, based on the extent to which they fell short, we hope it wasn’t all due to fees. For example, U.S. stock funds returned 7.8% in 2014, but the S&P Composite Index gained 13.3%. So unless you can believe the average actively managed U.S. stock mutual fund is charging 4.5%, there’s something else robbing investors of return.

Whatever the reason, there is plenty of evidence that active investing is a dangerous gamble.

Steve

Source: “Mutual Funds: Active Management Outed as a Failure AGAIN” by Daniel Putnam, InvestorPlace, March 12, 2015

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