The proof that active managers can't beat the market

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The SPIVA scorecard shows that active management is a bad bet.

The proof that active managers can't beat the market There’s a good reason investors are increasingly putting their money into index trackers and it’s because the evidence that active funds can’t beat the market continues to mount.

The bane of active managers lives is the S&P Indices Versus Active Funds (SPIVA) Scorecard which has tracked their performance against their benchmarks since 2002.

The news has been unrelentingly bad for active managers and their claims to superior performance for over a decade, and 2015 was no exception.
Over a 10 year timeframe, the majority of equity funds denominated in Pounds Sterling failed to beat their market benchmarks:
  • 89% failed to beat the global equity benchmark.  
  • 71% failed to beat the UK equity benchmark.    
  • 85% failed to beat the emerging markets equity benchmark.  
  • 94% failed to beat the US equity benchmark.
These numbers are truly shocking given that active managers justify their high fees by promising to outperform index trackers including ETFs.

Percentage of European Equity funds outperformed by benchmarks

Percentage of European Equity funds outperformed by benchmarks
Quelle: SPIVA Europe Scorecard 2015; 31.12.2015

Nowhere to hide

Active managers can enjoy short-run success in certain markets. For example, 88% of UK equity active funds beat their benchmark over one year.
But 52% failed to succeed over a full five years and the record only gets worse in other categories.
78% underperformed the US market over one year and 95% failed over five.
Active managers even faltered in relatively inefficient markets where they claim their stock-picking skills given them an advantage.
72% failed to beat the emerging markets index over one year, rising to 74% over five.
And while 51% of active managers outperformed UK small-cap equity over one year, their performance soon deteriorated as 78% failed over five years, rising to 81% over ten.
This abject failure is not restricted to UK fund managers. 97% of Euro denominated active funds failed to beat the global equities benchmark over 10 years.  
And 82% of US large cap managers failed to beat the S&P 500 over the last decade.
The worst performance of all? The 100% of active managers who lost to the Dutch index over five years.

Choose the superstars

Can you identify the small sliver of active managers who will outperform a decade ahead of time? The evidence is against it.
The S&P Persistence Scorecard reveals that no top quartile large or mid cap funds maintained their position over the last five years. 27% of the top-ranking funds dropped into the bottom quartile of the table between 2011 and 2015.
The Persistence Scorecard only covers US active managers but it beggars belief to think that UK fund managers have discovered some performance-enhancing secret that would make their record materially better than their US counterparts.
Another staggering finding in the SPIVA Europe Scorecard for Year-End 2015 is that 46% of active, Sterling funds investing in global equities have been merged or liquidated over the course of the last ten years. That casualty rate rises to 60% for European equity funds.
Poor performance is the overwhelming cause for closures and mergers of active funds as investors pull their assets from vehicles with weak track records.
This leads to survivorship bias - the phenomenon whereby fund houses massage their past performance by wiping out the negative contribution of failed funds.
However, investors faced with a choice of thousands of active funds have no way of knowing which will be eliminated in the years ahead.
The SPIVA Scorecard weights the odds back in the favour of ordinary investors by showing just how slim the chances of active management success really are.
The rational response is not to believe you can predict the tiny percentage of active managers who can maintain their success over an investing lifetime.
Instead, you can avoid active management failure by choosing a low-cost portfolio of ETFs designed to deliver the results of their benchmarks as closely as possible.  
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