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active management vs. INDEX-BASED INVESTING: 

an update on performance 


March 30, 2023

At The Mather Group, LLC (TMG), the annual S&P Indices Versus Active (SPIVA) Scorecard is an important data point in our pursuit of an evidence-based investment strategy. Standard & Poor’s monitors the ongoing performance of actively managed mutual funds to determine relative performance differences between funds that are attempting to beat the market and a fair benchmark. With the recent annual update, it appears 2022 was one of the strongest years for actively managed funds in the U.S. large-cap space over the prior 20 years; however, most active funds still underperformed their benchmark.

Even though 2022 was a relatively strong year for active management, it was still effectively a coin flip if an active fund would manage to beat the S&P 500 benchmark, as 51% of large-cap domestic funds underperformed the S&P in 2022. In fact, this was the fourth-best outcome for active funds since 2001, which shows how difficult it is to outperform the market. Looking at other equity sectors, performance was not as strong as the large-cap domestic asset class. For example, 57% of small-cap domestic funds and 68% of international funds underperformed their benchmarks in 2022.1

There is an argument that active funds have better outcomes in down markets, due to greater investment flexibility. Active funds can hold higher cash balances, deviate from a benchmark and avoid more volatile sectors of the market in their quest to outperform. So, it makes sense that the odds of an active fund outperforming tend to be higher in weak markets. But even in 2007 (when it was most likely for a Large Cap Domestic fund to outperform in the sample period), only 55% of funds managed to beat the market.

When looking at the historical data, it is apparent that—even in the best years for active managers—it is not significantly more likely that an active fund will outperform its benchmark. Longer-term data highlights the compounding effect of the tendency for active funds to underperform on a yearly basis. A fund that underperforms one year needs to not only beat the market the following year, but also beat the market by more than it underperformed the prior year in order to ultimately provide outperformance against the benchmark. The data below shows that this is unlikely to happen for many active funds, and the further back you review the data, the more improbable it becomes that an actively managed fund will outperform the index.

The belief at TMG is that most active funds do not outperform their benchmarks in the long run. Investors should carefully evaluate their investment goals and risk tolerance before selecting an investment strategy that is best suited for their needs. Although riskier than indexing strategies, active investments do have the potential to outperform due to flexibility and expertise. Ultimately, whether to invest in active or index funds depends on a variety of factors, and investors should consult with their advisor to determine the optimal investment mix for their unique situation.

SPIVA US Year-End 2022 Scorecard, Standard & Poor’s, March 2023.

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice nor is it intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives. Past performance does not guarantee future results.

The Mather Group



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