“The best way to own common stocks is through an index fund.” – Warren Buffet (1996)
The latest Standard & Poors (SPIVA) 2020 indexing study, has again exposed active fund managers – delivering a fresh blow for US stock pickers. Active fund managers continue to lose sizable market share against their index (passive) competitors. Over the past 10 years, 82% of fund managers fell short of their S&P 500 benchmark, with 87% failing over 15 years. Similarly 74% did not match up to the S&P Midcap 400, while 75% also underperformed the S&P Small Cap 600 – during this 10 year period (ending June 30, 2020).
These extremely poor results for traditional (active) fund managers, are repeated over the past 3, 5 and 15 years. Regardless of bull or bear markets, active fund manager underperformance continues.
Consequently, it is not surprising to see a growing number of active funds disappear. Over the past 15 years, almost 60% of all US domestic equity funds were merged or liquidated! Similarly almost 50% of global/international equity funds and 50% of all fixed income (bond) funds were merged or liquidated.
Globally the trend is getting worse for active fund managers. Projections in the US is for indexing to comprise as much as 60% of all mutual fund assets by 2025. Current US inflows into mutual funds are dominated by index fund players.
Performance summary
Over the past 10 years, the majority of US large cap funds have failed to beat their benchmarks. The numbers are equally unfavorable over both 3 and 5 year periods for all US Equity fund managers – with underperformance of the broader S&P 1500 at 71% and 80% respectively.
While it sounds appealing to invest with the current star fund manager, active manager underperformance is proving incredibly costly to investors. It is simply no longer prudent as few global fund managers remain stars. Mostly they are bright comets that flame out, shortly after reaching their brightest moment.
Those who list a few top-performing funds as evidence that indexing doesn’t work – are doing investors a disservice. While each year a number of active mutual funds beat their global index benchmarks – fewer than ever before are consistently outperforming their benchmarks.
Finding such needles in a haystack – are not worth the risk of underperforming well known global index benchmarks. Mr. Buffett clearly agrees, advising his wife to invest the bulk of her assets in the S&P 500. The longer the horizon, the worse traditional fund managers tend to perform relative to their global benchmarks. The vast majority of global investors would clearly be safer investing in an index fund.
For global equity, in both developed and emerging markets over the past 15 years – only a small minority of US fund managers have beaten their global benchmark indices (see below). The evidence is quite clear that picking an active manager will most likely leads to significant index underperformance.
The weak performance amongst Fixed Income (Bond) fund managers is worth noting. In various categories, including US government, High Yield and US Investment Grade areas – the percentage of bond funds outperformed by their benchmarks, regularly approaches 90% or higher.
Over the past 3, 5, 10 and 15 year periods – the vast majority of fund managers trailed their bond benchmarks by significant margins. (Table below) Less than 4% of managers beat the US Government Long Bond index over the past 3, 5 and 10 years. None beat the Barclays Emerging Markets Index over 10 years.
The latest results are the clearest indictment yet of ongoing poor active fund performance over the past 3, 5, 10 and 15 year periods. Selecting active fund managers that consistently underperform their benchmark, is a losing proposition.
Authors:
Anthony Ginsberg and Lisa Segall – Directors, GinsGlobal Index Funds Ltd