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Active Management Loses Ground

Sep. 09, 2016 11:29 AM ETSPSM, SPY1 Comment


  • Most Active Managers Are Unable To Outperform Benchmark S&P500.
  • Small-cap Managers Face An Even More Uphill Battle With 90% Under-performing S&P600.
  • There Is Room To Consider Model-based Systematic Investment Strategy.

US Stock Market

Is Active Management Continuing to Lose Its Heft in Generating Market Alpha?

That's what it looks like.

The S&P Dow Jones Indices, LLC publishes a tabulation of Active versus Passive Investment Management performance twice a year. According to this scorecard, 66 % of all large-cap managers underperformed the S&P 500 (SPY) benchmark during 2015. Over a longer horizon of 5-and-10-years, the active managers underperformed even more so, in a range of 82%-84%.

The subset data changes for different styles of investment, like growth and value.

The scorecard gets even worse for small-cap stocks. In 2015, over 72% of active small-cap funds lagged the benchmark S&P Small Cap 600 (SLY) index. And similar to their peers in large cap active management, the small-cap managers performed worse over longer time horizons, with 88%-90% underperforming.

This is not an anomaly, with similar underperformance recorded in prior years.

Underperforming Fund Managers

Source: S&P Dow Jones Indices

There is an ever-shrinking subset of active managers that outperform during short periods. But even such a group shifts towards extinction when the time horizon is extended. High fees is just one part contributing to the underperformance or alpha drag, along with other reasons like, reversion to mean and behavioral biases. One thing is clear. Evidence proves that it is very hard to consistently identify sustainable alpha over time with active management.

Nobel economist Paul Samuelson, whose paper Challenge to Judgment in the Journal of Portfolio Management in 1974 contributed to inspiring Vanguard founder John Bogle to pursue index funds, recognized the inconsistency and underperformance of active management over time, when he noted that:

…respect for evidence compels me to incline toward the hypothesis that most [active management] portfolio decision-makers should go out of business.

While there is a preponderance of evidence emphasizing the highly difficult task for active-management to compete

This article was written by

Tarun Chandra, CFA profile picture

I have gained extensive experience as an Analyst, working in both Buy (Asset Management) and Sell (Investment Brokerage) side roles, as well as holding positions in Strategy and Finance within the technology services sector. Over the years, I have focused on publishing quantitative model portfolios that prioritize risk-adjusted returns.

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Comments (1)

Blake Morgan profile picture
It's actually shocking how well the SP 600 has performed. Nearly 2% better annually in the long run than the Russell 2000 and 1% better than Vanguard's small cap ETF annually. The only possible explanation is that the SP 600 excludes companies that do not make a profit. Seems to be effective.
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