Active vs. Passive Management - An Update on Performance

active vs. passive management - an update on performance 


The Mather Group, LLC (TMG) remains consistent in its belief that an index-based investment strategy is expected to outperform its more active competition over a long-term investment horizon.  However, it is important we continue to monitor the debate as new research emerges.  One key tool in monitoring the performance of active versus index-based funds has been the S&P Indices Versus Active (SPIVA) scorecard which has been released annually since 2002. S&P’s reporting accounts for:

  • Style Consistency: The tendency of a fund to deviate from its investment strategy over time.
  • Risk-Adjusted Returns: A fund that underperforms its index may still be a solid investment, if it is taking less risk than its benchmark. SPIVA releases a separate report that accounts for differences in volatility across funds.
  • Survivorship Bias: S&P’s data set incorporates funds that have ceased operations.

SPIVA measures style consistency as a fund having the same style classification (e.g. large-cap growth, large-cap value) at the beginning and end of a measurement period.  Style drift can occur naturally as a fund’s winning investments change classification (a small-cap company grows to the point it would now be classified as mid-cap) or as a decision by a fund manager to invest outside their mandate.  Regardless of how it occurs, it is important to identify the correct fund category for a fund to be sure that its performance is being viewed against a fair benchmark.  SPIVA accounts for this in their analysis and compares each fund to an appropriate index based on the fund’s actual portfolio.  SPIVA found that 91% of U.S. equity funds maintained a consistent style during 2020; however, when looking at longer time horizons, that number drops to 67% over 5 years and 49% over 10 years.1  This drift has potential ramifications on the risk management within a portfolio. For example, if your chosen growth stock fund manager’s strategy starts to drift towards a value strategy, you would be unintentionally increasing your allocation to value stocks while decreasing exposure to growth.

On average, the SPIVA report shows short-term outperformance of an index is possible, but difficult to achieve.  In most years, 40-65% of US Domestic Equity funds have underperformed the S&P 1500 composite index:

Last year was no exception with 57% of domestic equity funds and over 50% of international equity funds underperforming their benchmark in 2020. The long-term trend of SPIVA’s findings has been that outperformance becomes increasingly rare as the time horizon expands.  When U.S. active equity fund performance is compared to its index over a 20-year period, over 85% of funds underperformed their benchmark. In the fixed income categories, results were slightly improved with only 60% of fund managers underperforming their benchmark over the prior 15-year period. Fixed income benchmarks can be less precisely defined, making the index more difficult to track.

S&P then looks at the ratio of return to volatility to determine if this underperformance can be attributed to differing risk levels in active funds.  Their results show active managers do not have significantly improved performance when accounting for risk.  In fact, while 86% of domestic equity funds underperformed their benchmark in absolute terms over a 20-year period, over 90% of these funds underperformed on a risk-adjusted basis.3

Potentially the most important aspect of the SPIVA report is the fund survivorship data.  Underperforming funds tend to lose investment capital over time and are eventually shut down.  SPIVA estimates that 5-10% of funds are liquidated on an annual basis.  When looking at the prior 20-year period, 68% of domestic equity funds and 69% of international equity funds have closed.4

Since consistently underperforming funds frequently close, investors choose between active managers that were primarily winners of the past.  However, sustained outperformance is not guaranteed or to be expected.  An illustrative example: in 2010, Morningstar nominated five fund managers as their Domestic-Stock Fund Manager of the Decade based on their prior performance.  These funds failed to outperform their benchmark over the following decade.5 The eventual winner of the award, The Fairholme Fund, underperformed the S&P by over 7% per year over the past 10 years.6

Source:   Fairholme Capital Management Portfolio Manager’s Report, Fairholme Capital, January 2021

In short, it is both very difficult to know which managers will be able to outperform their index and to know when the strategy will stop working.  Investors should not expect the same asset class or investment strategy to outperform the market in perpetuity. Given the challenges in maintaining a consistent investment allocation, predicting the fund managers who will be able to outperform the market, and correctly reallocating away from those fund managers before their own strategy potentially underperforms, The Mather Group continues to believe an active investment approach works to the detriment of most investors.  SPIVA’s data consistently shows that over the course of a long-term financial plan an index-based investment strategy that does not face these same hurdles is expected to lead to better investment outcomes for our clients.


1SPIVA US Year-End 2020 Scorecard, Standard & Poor’s, April 2021, page 10.
2SPIVA US Year-End 2020 Scorecard, Standard & Poor’s, April 2021, Summary.
3Risk-Adjusted SPIVA Scorecard Year-End 2020, Standard & Poor’s, March 2021. page  5.
4SPIVA US Year-End 2020 Scorecard, Standard & Poor’s, April 2021, page 12 & 18.
5Morningstar’s Fund Managers of the Decade….A Decade Later’, Human Investing, November 2019.
6Fairholme Capital Management Portfolio Manager’s Report, Fairholme Capital, January 2021

 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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