New Data Shows Active Managers Continued to Fail in 2008

More than 70% of all actively managed U.S. equity mutual funds trailed their benchmarks for the five years ending 2008, according to the new Standard & Poor's Index Versus Active Fund Scorecard (SPIVA).

The new report shows that 71.9% of actively managed large-cap funds trailed the S&P 500; 75.9% of actively managed mid-cap funds trailed the S&P MidCap 400; and a stunning 85.5% of actively managed small-cap funds trailed the S&P SmallCap 600.

S&P says the results were consistent with the previous five-year cycle, from 1999 to 2003.

"The belief that bear markets strongly favor active management is a myth," said Srikant Dash, global head of Research & Design at Standard & Poor's, in a statement. "A majority of active funds in each of the nine domestic equity style boxes were outperformed by indices during the down markets of 2008. The bear market of 2000 to 2002 showed similar outcomes."

Actively managed funds also did poorly on a one-year view: 54% of large-cap funds trailed the S&P 500; 75% of mid-cap funds trailed the S&P MidCap 400; and 84% of small-cap funds trailed the S&P SmallCap 600.

Narrowing down, the single worst category for active managers in 2008 was small-cap growth, where a dizzying 96% of managers trailed their benchmark.

The only bright spot was Large-Cap Value ETFs, which trounced the S&P 500 Value index in 2008, with 78% of actively managed funds beating their benchmark.

But the story turns dismal again for active investors when you look abroad, on both a one- and five-year basis. Sixty-three percent of global funds trailed the S&P Global 1200 on a five-year basis; 84% of international funds trailed the S&P 700; 59% of international small-cap funds trailed the S&P Developed Ex-US Small-Cap; and 90% of emerging market funds trailed the S&P/IFCI Composite.

The emerging markets case is especially galling, as active managers like to claim that they add extra value in illiquid markets. On a five-year basis, however, the average emerging market fund trailed its benchmark by more than 3% per year.

Fixed income is no better. Over five years, the percentage of fixed-income funds that outperform their indexes in all standard domestic categories is less than 10%. The only exceptions are in high yield, where 48% of funds beat their benchmark; global fixed income, where 21% beat their benchmark; and emerging markets debt, where 38% beat their benchmark.

All results are adjusted for survivorship bias.

Original link

Comments

[Analyste de...:]

A former employer use to preach loudly that index funds were weak choices, that the investment advisor adds value to the portfolio by identifying superior active managers for different asset classes. Very likely (almost certainly?) HE failed to do that, but he never would show me HIS long-term performance either.

This is the story the 'active managers' crowd does not want you to read... every investor should demand to see real long-term & not hypothetical 'strategy' performance from his/her advisor.

Gotta love ETFs.

Apr 20 03:48 PM

[D_Virginia:]

I've never known anyone in the finance industry who wasn't 80% focused on making himself money and only 20% focused on doing whatever his actual job was.

So another issue here is motivation. Let's face it, these are people who get paid to trade -- not necessarily to trade successfully. Maybe they get let go for poor performance, but then they just go get the same job someplace else.

I think a smart active trader can do just fine...with his own money, and only with his own money. Emphasis on smart.

Also, if you're just going to let your money sit somewhere, you have no need for a money manager.

Apr 20 06:03 PM

[metricon:]

I believe that the larger a mutual fund is, the harder it is to manage. An informed investor managing less than say, two million dollars, can do a lot better than a mutual fund with hundreds of millions. Why? Such an investor can move in and out of the market swiftly, parking money where it can benefit from news and trends...

For example, many of the etfs doing quite well are very low volume etfs. By the time a fund managing billions parks 50 million dollars in such a fund, a small investor is in and out, and looking for greener pastures, especially with todays low trading costs.

Funds are for people who dont have the time, or the curiosity, to keep abreast of the markets.

Apr 20 06:07 PM

[ADV:]

Stocks are meant to be bought and sold. So called passive indexes pull out and put in stocks. If you had bought GE, Intel, MSFT, in 2002 you would still be underwater 7 years later. There are plenty of funds out there that beat the indexes in relative terms. Modern portfolio theory has caused many advisors and investors to commit sucide over the last year.

Apr 20 06:44 PM

[dcb:]

like when you said google at a thousand was a buy? I don't like to attack someone, but you are false. say the same thing over and over, and I will bet have an awful investment record. I do not know if you have an illness, I hope so, because otherwise there is no excuse for your postings. Publish your holdings and trades. Since you were advocating buy and hold at the top of the market one would imply about a 50% loss. Stop attempting to fool people as to what your are. Put up or shut up. This is an open an honest forum for people who want to add to the discussion, not for people who want to attract attention to themselves. You offer no insight, provide no entry or exit positions, or have stated what you bought and when on what days for what price.

You advocated buy and hold for google at the top of the market. How is that trade working out. "buy all dips" you have been saying the same thing for a year and 1/2.

I really don't mean to attack so much, but enough is enough. you have made about 1,000 comments and all have been the same. You appear to learn nothing from the comments people make towards your posts, and offer no evidence to support your views. I just think it is a cry for attention.


On Apr 20 06:07 PM Cetin Hakimoglu wrote:

> That's why I like buy & hold. No need to be an active trader
> when you can make long term, market crushing gains with stocks like
> Google and POT.

Apr 20 06:53 PM

[optionsgirl:]

The artlcle states that active managers trail the markets, but doesn't state why. I'd like to know why. Any thoughts on this? I am speculating that part of the reason is because they aren't permitted to hold much cash- they have to be market participants no matter what is going on (during steep declines, for instance) and have to be long the market, too. Could it be the constraints of those funds cause them to be long term losers? I don't know the answers, I'm just throwing out the question!

Apr 20 11:38 PM

[Etf Planet:]

I believe the main reason is that active managers have the ability to time the market, and the indexes do not. As long as the manager's holdings are similar to the benchmark, and hold a good amount, say 30+ stocks, then the actual stock choices from the benchmark universe wont matter all that much. However, the manager thinking he/she is smarter than the market - buying and selling on swings always causes these managers to get blown out in the long run.


On Apr 20 11:38 PM optionsgirl wrote:

> The artlcle states that active managers trail the markets, but doesn't
> state why. I'd like to know why. Any thoughts on this? I am speculating
> that part of the reason is because they aren't permitted to hold
> much cash- they have to be market participants no matter what is
> going on (during steep declines, for instance) and have to be long
> the market, too. Could it be the constraints of those funds cause
> them to be long term losers? I don't know the answers, I'm just throwing
> out the question!

Apr 21 12:07 AM

[E.D. Hart:]

Where managers add real value is in choosing different asset classes to manage money, rather than picking stocks. As studies have shown from Ibbotson and others, 70-90% of long term returns are due to asset choices, and not stock choices. Yet, investors spend an inordinate amount of time on timing the markets, and choosing the right combination of equities.

A better approach is to broadly allocate your capital among the five major asset classes (stocks, bonds, cash/currencies, real estate, and commodities) and weight them relative to what you (or your manager) thinks the likely economic future holds.

My current weightings:

Commodities: 30%
International Large cap Equities: 30%
Bonds: 20%
Real estate: 5%
Cash/currencies: 15%

I don't pretend that this is optimal allocation--many others may have, and will have better, but my goal is to spend 80% of my time on asset allocation, and less than 20% of my time on the vehicle to carry out that strategy.

Apr 21 08:39 PM

[Analyste de...:]

Optionsgirl-
>The article states that active managers trail the markets, but doesn't state why. I'd like to know why.

There must be a corpus of mathematical theory to explain this. The average beats the vast majority of participants, especially in times of great volatility. True, there are times when its easier for active managers to beat the Market indices - that's what active managers trumpet loudest in Bull periods, because there's an rigid Bullish bias to portfolio management in the US. But longer term, across different market cycles, almost no one beats the averages consistently.

Can that change? I'm most curious why "superior" managers who succeed in UP markets usually lag in DOWN, and vice versa. There must be some philosophical bias (BULLISH or BEARISH) that accounts for the either/or nature of outperformance among the so-called best managers, if it's not largely a function of LUCK.

How many will honestly admit that?

Apr 22 12:09 PM