The 16th S&P Indices Versus Active (SPIVA) Scorecard is in and once again, the verdict is not at all surprising—investment managers are overrated. Their role is oversold and falsely esteemed.
In fact, theirs is a random walk. And perhaps, Burton Malkiel, (American economist) described it best: “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would just do as well as one carefully selected by experts.”
Why active funds have survived this long is anyone’s imagination. It seems investor ignorance plays a big role. That said, here are some key highlights from the report.
One, a majority (65 percent) of large cap funds underperformed the S&P 500 for the ninth consecutive year. Two, 77 percent of international funds lagged the S&P 700, while the majority of emerging market managers failed to beat the S&P/IFCI Composite.
Three, over the long-term investment horizon, specifically 10 and 15 year periods, 80 percent or more of active managers across all categories (large, mid and small cap) underperformed their respective benchmarks.
Four, 57 percent of US equity funds, 49 percent of international equity funds, and 52 percent of all fixed income funds were merged or liquidated over the past 15-years. Five, managers who beat the market often fail to keep their momentum past two years. In short, active managers aren’t worth the fees they charge.
So, here are my thoughts on the above, in relation to our local industry: One, for local retail investors, just liquidate your fund holdings, buy the index constituent names and hold. This is because fund returns after fees are setting back most of these guys behind their investment goals.
Astronomical fees in the two-five percent region (for most equity funds) are causing more harm than good. When there’s no value for money, it’s pointless for them to hold onto an expensive strategy.
Two, it would be best if local fund houses considered low-cost passive index funds. Focusing on growing assets alone in order to charge lower fees will not cut it in the end. Only three of the top 10 funds worldwide are actively managed funds, according to Morningstar.
Besides, that race to the bottom has its limits when you have managers to compensate. Stock picking is a losers’ game and investors are becoming aware of this fact. Perhaps, it’s time the industry considered passive alternatives. This way, everyone gets to survive and benefit.
Three, there’s need for reflection as an industry. Are we really providing value? Is status-quo more important than stewardship? And what’s the role for business schools in this issue? Understandably, these are real and perhaps contentious points of reflection, but there’s got to be a starting point. To add, on a humble note, I admit my folly. I have been a long-time advocate of active management.
In closing, it’s clear that active funds are bleeding. One may say that they’re on the brink. Now, whether this is another secular trend that may change in the future is anyone’s guess. The fact is, the current investment landscape is fast changing. The SPIVA findings are evidence to this effect. We’re at a watershed moment.
Mr Mwanyasi is managing director at Canaan Capital Limited.