Investors should get to know Spiva. No, Spiva is not akin to a Siri, or Alexa, or any other artificial intelligence device that is ready and able to answer any question you may have. Spiva is just a boring document, an investment scorecard, if you will. But the Spiva U.S. Scorecard will help with future investment decisions much more than any AI device.
The 2016 Mid-Year Scorecard was recently released and it’s very informative. The crux of the situation is that if you come in contact with 10 money managers who all claim, on average, to outperform a basic benchmark index, be it the S&P 500 or some other benchmark, they’re lying through their teeth. In fact, over various time periods ranging from just one year to upwards of ten years, about 8 in 10 fund managers will lose to their benchmark index.1
What does this mean then? How can 80% fail at the only job they have: beating an index fund? After all, you could just buy an index fund for five basis points, sit back, watch returns compound, and most likely beat any money manager over any extended period of time. So, why do money managers even have jobs? And what does this mean for investors as a whole? Let’s take a look at the findings from the report in some very simple (and sobering) statistics:
During the past year, 84% of large-cap managers underperformed the S&P 500.
Mid-cap and small-cap managers did even worse, with about 88% failure rates for both groups.
Maybe this was merely a fluke, though. Perhaps if longer time periods were taken into account, these money managers could prove their worth. How about five- or ten-year performance?
Over the last five years, 91% of large-cap managers lost to the S&P 500.
Mid-cap managers fared slightly better against their respective benchmark index with just 88% underperforming.
This pales in comparison to the 3% of small-cap managers that were able to beat their benchmark. With a 97% fail rate, how does one keep a job in this industry?
Over the past ten years the story stays the same. 85% of large-cap managers, 91% of mid-cap managers, and 90% of small-cap managers failed to outperform the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
Equity fund managers attempting to deliver above-market returns have had a rough time justifying their skill set, if that’s what you’d like to call it. So, how have fixed income managers done against their benchmarks?
Over the past year, the majority of bond fund managers investing in government and corporate credit categories lost to their benchmark. The only group that managed to outperform were those managers in intermediate-term corporate credit funds.
In the seminal book A Random Walk Down Wall Street, author Burton Malkiel quipped that “a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.”2 Maybe this wasn’t hyperbole after all.
In short, the next time your financial advisor or money manager tells you they can beat the market, decide whether you're going to play the odds and buy the index, or take his/her word and hope they're one of the few that can consistently beat their benchmark. The dart-throwing monkey is always an option as well.
1. https://us.spindices.com/search/?ContentType=SPIVA, SPIVA U.S. Mid-Year 2016
2. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Burton G. Malkiel