• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
Dispatches

Most Mutual Funds Do Not Outperform

The difficulty of selecting an actively managed mutual fund that will outperform its benchmark in the future was highlighted in reports from S&P Dow Jones Indices.

The difficulty of selecting an actively managed mutual fund that will outperform its benchmark in the future was highlighted in reports from S&P Dow Jones Indices. The SPIVA U.S. Scorecard found fewer than 18% of all domestic funds beat their benchmark over the previous 10- and 15-year periods. The Persistence Scorecard found a mere 7% of domestic mutual funds consistently outperformed the S&P Composite 1500 index over periods of three consecutive years.

The two scorecards complement each other, but are separate. SPIVA stands for “S&P Indices Versus Active.” It measures the percentage of mutual funds that have outperformed their index benchmarks. The Persistence Scorecard measures the likelihood of a mutual fund whose performance ranks within the top quartile for a given category continuing to stay in the top quartile over the following three and five years. Combined, they measure the ability of an active mutual fund manager to realize higher returns than both the relative benchmarks and peer funds.

As noted above, fewer than 18% of all U.S. domestic funds beat the broad-based S&P 1500 index over the past 15 years. (This is the first time S&P Dow Jones Indices has published 15-year SPIVA data.) Over the shorter period of five years, fewer than 15% of actively managed mutual funds bested the index’s returns.

In addition to the issue of returns, the likelihood of a fund investing in the same type of securities (e.g., mid-cap growth), a practice referred to as “style consistency,” waned as the period of time measured grew. About three-quarters of domestic funds maintained their style over the past five years. This number dropped to 54% for the past 10 years and just 39% for the past 15 years.

In terms of persistence, just under 20% of the 1,034 large-cap funds in existence as of September 30, 2013, outperformed the S&P 500 index over the next 12 months. By September 30, 2015, just 15.7% of those funds beat the large-cap index. By September 30, 2016, none of those funds continued to consistently outperform the S&P 500. Only real estate (29% for three annual periods ending September 2016) and large-cap value (6%) showed evidence of persistency.

Sources: “SPIVA U.S. Scorecard,” April 17, 2017, and “Fleeting Alpha: Evidence from the SPIVA and Persistence Scorecards,” Aye Soe and Ryan Poirier, March 10, 2017, S&P Dow Jones Indices.

Discussion

Thomas Blaikie from PA posted over 9 years ago:

I can appreciate consistent performance of funds relative to their benchmarks. However, to me, performance of actively managed funds relative to benchmarks is more important. Are there date comparing performance of actively managed funds relative to their benchmarks over similar time periods?


Richard Vroman from CA posted over 9 years ago:

@Thomas Blaikie. If I understand your question, SPIVA provides exactly what you are looking for. Not only are there data for each year for each index from 2001 through 2016, there are data for periods of 1, 3, 5, 10, and 15 years. There is a lot more besides including equal weight ratings and asset weighted ratings which will give some indication of how actual investors in active funds fared judging by the amounts invested. This brief notice is one of the most important things yet from AAII. One hears and reads oceans of alleged data advocating one or another flavor of active management. There is almost never any reference to the SPIVA data, let alone any argument to refute it. While it may be possible that some new fad, like factors, will prove out, one waits to see it done long-term by real funds with real money (recall the nifty fifty and the tech bubble). The 15 year survivorship of only 42% for all domestic equity funds recommends doubt as the appropriate default attitude. Many funds tried, and many funds died. There is no obvious a priori reason that today's gimmick will be any better than yesterday's gimmicks.


JWVander Sluis from IA posted over 9 years ago:

Disclosure: It is not possible to invest directly in an index. So immediately your numbers are suspect. Thomas Blakie is correct.


Richard Vroman from CA posted over 9 years ago:

Maybe Thomas Blaikie means that active funds must be compared to an appropriate benchmark. SPIVA does so by comparing funds to indices that match their stated strategies. The persistency tables show that active funds are anything but consistent. Agreed, it's not possible to invest directly in an index. Nor is it possible to invest directly in any other benchmark I can think of. I must be missing the point. Various indices seemingly ARE the most common benchmarks of active as well as passive funds. A good index fund (well run, lowest fees) comes close enough to its benchmark index that prospectively picking active funds that will beat the index is a crap shoot against long odds at best. Inability to invest directly in an index is a bit of a straw man. Look at the SPIVA tables. For the one year period the SP 1500 beat 60% of all domestic equity funds. That was the lowest number for any category for any period up to 15 years (the limit of the data). With few exceptions the percentage of funds beaten by the index was mid-70s to mid-90s for all categories and all periods. Those active funds that do beat the index rarely do so for long. There's too little difference between good index funds and the index for more than a tiny number of active funds to beat an index fund but not index itself. That would be the only way for active funds to gain an advantage without actually beating the index. SPIVA shows that active has not beaten the indices over the periods noted. If you can show how SPIVA is incorrect, I'd love to hear it. I've tried to get folks at Fidelity to do so for years in order to substantiate their claims for active management.


J Shroff from TX posted over 8 years ago:

Is there3 a LIST of MUTUAL FUNDS that consistently OUTERFORM the INDICES they represent?


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: