Just going over some data on actively managed vs. passively managed funds and wanted to post the Standard & Poor’s Indices Versus Active (SPIVA) report link:

S&P SPIVA Report Cards

S&P is the creator of the S&P 500 index plus a variety of other domestic and international stock and bond indices. They put out their report card each year to see how industry wide performance matches up to simple index tracking funds. As you may know if you follow the passive investing style of the Permanent Portfolio, actively managed funds do poorly. Here are some highlights:

Over the past three years, which can be characterized by volatile market conditions, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. – SPIVA Report 2011

Over five years ending June 2008, S&P 500 outperformed 68.6% of actively managed large cap funds, S&P MidCap 400 outperformed 75.9% of mid cap funds and S&P SmallCap 600 outperformed 77.8% of small cap funds. – SPIVA Report 2008

Pretty much as expected. Actively managed funds will underperform once management costs are subtracted. With average annual expense ratios on funds around 1.3%, it means that the average fund is likely to underperform the index average by at least 1.3% a year. Index funds have the advantage because their management fees are so low. An index fund by comparison may charge only 0.20% (or even less than 0.10%) a year leaving the rest of the market returns for the investor and not the managers.

It doesn’t look good for international funds, either:

Among global equity funds, five-year results show S&P Global 1200 outperforming 70.1% of global equity funds, S&P 700 outperforming 86.5% of international equity funds, and S&P IFCI Composite outperforming 73.9% of emerging market funds. – 2008 SPIVA Report

Also Wall Street continues the tradition of merging or liquidating poor performing funds at a very high rate. Over the years the disappearance of badly performing funds from the books helps to boost the remaining funds’ performance figures:

Funds disappear at a meaningful rate. Over five years, 26.8% of U.S. equity funds, 22.5% of global equity funds and 24.7% of fixed income funds have been merged or liquidated. – 2008 SPIVA Report

The SPIVA reports only go back five years at a time, but going back further means the results just get worse for actively managed funds and better for the low cost index funds. The above is why the Permanent Portfolio only uses index funds for the stock allocation and does not try to beat the market with timing strategies, etc. Over the long run, just trying to capture the market returns is the best way to beat virtually all active money managers.

Related posts:

  1. Trading Against Pros