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S&P data from around the world delivers another crushing blow to active management

, Written By Ben Brinkerhoff

Consilium works with advisers all over the country in practices both large and small. Our observations is that most underlying investors care very little for the nuances of investment management. However, they do care about their goals, and they trust advisers to allocate to an appropriate portfolio to achieve those goals.

Occasionally, however, it’s a good idea to inform your investors about our investment philosophy and the difference it makes for achieving their goals.

One tenet of that philosophy is we don’t use investment managers that do the following:

  1. Believe they know more than markets and concentrate portfolios into a few selections
  2. Try to time when to get in and out of markets
  3. Charge high fees commensurate with their claims about skill

You might classify managers that do these things as ’active’. They either work for fund companies or brokers, but they all tend to employ at least one of the approaches on the list above.

Investors might think, why not try to time markets? Why not concentrate my portfolio into the investments I think are likely to beat the market?

Of course, some who manage funds in this manner have achieved high returns, so to them it may seem logical to at least try and replicate their success.

Because managing money actively makes intuitive sense, advisers should let their clients know about the overwhelming evidence which shows these methods lose more money for investors then it wins and thus why investors probably want to avoid giving their money to active managers.

In summary, what does this evidence show? It shows that when measured objectively, managers that use the active techniques described above have lower returns than a comparative market benchmark, on average. Further, while that statement is typically true over one year periods, it is almost always true over 10 to 15 year periods.

Standard and Poor’s (S&P) is one of the best places to find this evidence. Every year they measure the returns of active managers against an appropriate benchmark, and publicly share the results. The chart below shows the percentage of active managers that outperform their market benchmark, across a number of different countries.

Table 1: SPIVA 2008 percentage of equity funds outperforming their Index over 10 years

Source: S&P Dow Jones Indices LLC. Data as at 31 December 2018. Returns shown are annualised. Past performance is no guarantee of future results. SPIVA report underperformance, Consilium has taken the inverse which is outperformance for this illustration. Table is provided for illustrative purposes.

Looking at the chart above, only 16% of US actively managed funds had returns better than a comparative benchmark over the past 10 years.

We highlight the US in yellow, as some claim active management doesn’t work in the US only because it’s such a competitive market, but that it does work better in smaller markets such as New Zealand.

This claim, however, is debunked by the data. Indeed, the US is a competitive market, but in other less competitive markets such as Mexico, Poland, Brazil and Chile, active managers do even worse than in the US. As the graph shows, the US is just in the middle of all countries where this analysis is carried out.

The fact is, in every single country analysed, the average returns of active managers are lower than their local market benchmark over the past 10 years. We have no reason to expect New Zealand would be any different. In fact, a new academic study about New Zealand just published in 2018 shows this is the case.

This is also true for different styles of investing. It doesn’t matter if you are investing in large companies, small companies, inexpensive (value) companies, or even expensive (growth) companies…the average active manager does worse than the market in which they invest.

Take a brief look at the US market cut 18 different ways. The results are the same.

Table 2: SPIVA 2018: Percentage of US equity funds that outperform their benchmarks

10 YEAR (%)
All domestic funds S&P Composite 1500 16
All large cap funds S&P 500 15
All mid cap funds S&P MidCap 400 12
All small cap funds S&P SmallCap 600 14
All multi cap funds S&P Composite 1500 14
Large cap growth funds S&P 500 Growth 16
Large cap core funds S&P 500 7
Large cap value funds S&P 500 Value 18
Mid cap growth funds S&P MidCap 400 Growth 13
Mid cap core funds S&P MidCap 400 10
Mid cap value funds S&P MidCap 400 Value 12
Small cap growth funds S&P SmallCap 600 Growth 14
Small cap core funds S&P SmallCap 600 7
Small cap value funds S&P SmallCap 600 Value 13
Multi cap growth funds S&P Composite 1500 Growth 13
Multi cap core funds S&P Composite 1500 8
Multi cap value funds S&P Composite 1500 Value 19
Real estate funds S&P United States REIT 12

Source: S&P Dow Jones Indices LLC. Data as at 31 December 2018. Returns shown are annualised. Past performance is no guarantee of future results. Table is provided for illustrative purposes only.

In each of the 18 ways the US market is dissected above, the vast majority of active managers performed worse than the appropriate market benchmark.

So, what does this mean for the clients of financial advisers and their goals, which is really all investors care about?

Well, it means a lot. Looking at the SPIVA 2018 US data, the average fund underperformed its benchmark by 1.43% over the last 15 years .

Table 3: SPIVA 2018 average US equity fund performance (equal-weighted)

1 YEAR (%) 3 YEAR (%) 5 YEAR (%) 10 YEAR (%) 15 YEAR (%)
S&P Composite 1500 -4.96 9.17 8.25 13.20 7.93
All US domestic funds -8.26 6.67 5.14 11.53 6.50
Difference 3.3 2.5 3.11 1.67 1.43

Source: S&P Dow Jones Indices LLC. Data as at 31 December 2018. Returns shown are annualised. Past performance is no guarantee of future results. Table is provided for illustrative purposes only.

1.43% is a large amount. Let’s say that your client invested $1,000,000 15 years ago. Forgetting taxes and other fees, let’s say she got the return of the market listed above. By contrast her friend invested the same amount on the same day, but got the average return of active managers, which is 1.43% less. How much more would your client have now compared to her friend?

Answer: $570,000 more

That’s a figure that matters. This isn’t just an academic issue with no relevance to your clients. This is a critical issue with real meaning for your clients’ futures. What could any one of your clients do with an extra $570,000? A lot, and that’s the point.

What do your clients have to do to earn that extra return? They have to do something very simple and very hard. They need the discipline to ignore the chatter, marketing, media and noise from investment managers; those touting their recent (read, one year, three year or five year) track records and performance, and the promise of the riches they will bring if investors simply switch their portfolio. Your clients also need to ignore the relentless headlines predicting doom and gloom and stay disciplined in the markets. The last 15 years in this example include the years 2004 – 2018. That period wasn’t exactly the easiest one in which to stay invested.

Few investors have either the correct information or the discipline to ignore the chatter and stay invested so they don’t miss out on the available market returns. But the advisers we support work hard to ensure that their clients don’t miss out. By avoiding the siren song of the active managers and instead looking ahead with a long term focus, your clients can get the returns they deserve.

By Ben Brinkerhoff
Head of Adviser Services,


1Frijns and Indriawan (2018) who state in their abstract, “The returns on NZ equity holdings of NZ actively managed funds from 2010 to 2017 provide little evidence of risk-adjusted outperformance and stock-picking skill. These exposures yield pre-cost returns that have a nearly perfect correlation with the market index and an insignificant alpha.” https://www.emeraldinsight.com/doi/abs/10.1108/PAR-10-2017-0079

2Source: S&P Dow Jones Indices LLC. https://us.spindices.com/documents/spiva/spiva-us-year-end-2018.pdf?force_download=true Report 3” Average U.S. Equity Fund Performance (Equal Weighted), Category “All Domestic Funds” in comparison with the S&P Composite 1500.