S&P Dow Jones Indices, the “de facto scorekeeper of the active versus passive investing debate,” recently released its “SPIVA U.S. Year-End 2020” report. Here’s an overview of the SPIVA Scorecard:
There is nothing novel about the index versus active debate. It has been a contentious subject for decades, and there are a few strong believers on both sides, with the vast majority of market participants falling somewhere in between. Since its first publication in 2002, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. When headline numbers have deviated from their beliefs, we have heard passionate arguments from both camps.
Beyond the SPIVA Scorecard’s widely cited headline numbers is a rich data set that addresses issues— often far more fascinating though far less discussed—about measurement techniques, universe composition, and fund survivorship. These data sets are rooted in fundamental principles of the SPIVA Scorecard, with which regular readers will be familiar.
Here are some highlights of the 2020 Year-End SPIVA US Scorecard (bold added):
- The year 2020 was tumultuous for financial markets. The COVID-19 pandemic threw the world into chaos early in the year, with the S&P 500® falling 33.8% between Feb. 19, 2020, and March 23, 2020. Governments and central banks pulled out their playbooks from the global financial crisis of a decade earlier and acted swiftly to increase spending and ease monetary policy. Financial markets rapidly recovered, with the S&P 500 regaining its all-time high by August and ending the year up 18.4% after shrugging off U.S. election histrionics.
- The torrent of liquidity depressed interest rates and pushed up asset prices nearly everywhere investors looked. Of the 31 distinct benchmarks tracked by this report, 30 finished with a positive return for 2020; the S&P United States REIT (-7.5%) was the only exception.
- The positive market performance broadly translated into good absolute returns for active fund managers. While the turmoil and disruption caused by the pandemic should have offered numerous opportunities for outperformance, 57% of domestic equity funds lagged the S&P Composite 1500® during the one-year period ending Dec. 31, 2020.
This is the first SPIVA report for the US that included a 20-year investment period, the previous reports only provided performance results over a 15-year period as the longest horizon. Here are the long-term investment results for a full 20-year investment time horizon from 2001 to 2020.
- Over the most recent 20-year investment horizon, active managers of 96% of large-cap growth and large-cap growth funds, 94% of large-cap funds, 90% of all multi-cap funds, 88% of mid-cap and small-cap funds, and 86% of all domestic funds failed to outperform their benchmarks (see table above).
MP: Stated differently, over the last 20 years from December 31, 2000, to December 31, 2020, only one in 28 large-cap core fund and large-cap growth fund managers, only one in 16 large-cap managers, only one in 10 all multi-cap fund managers, only one in 8 mid-cap and small-cap managers and only one in seven all domestic fund managers were able to outperform their benchmark indexes. So it is possible for some active fund managers to “beat the market” over various time horizons, although there’s no guarantee that they will continue to do so in the future. And the percentage of active managers who do beat the market is usually pretty small – only 6% for large-cap managers over the last 20 years; and they may not sustain that performance in the future. For most investors, the ability to invest in low-cost, passive, unmanaged index funds like the Vanguard 500 Index Fund (expense ratio of 0.04%, or $40 per $100,000 invested) and outperform 94% of high-fee, highly paid, professional active fund managers seems like a no-brainer, especially considering it requires no research or time trying to find the active managers who beat the market in the past and might do so in the future.
Here’s a golf analogy from Burton Malkiel:
It’s true that when you buy an index fund, you give up
the chance to boast at the golf course that you picked the best
performing stock or mutual fund. That’s why some critics claim that
indexing relegates your results to mediocrity. In fact, you are
virtually guaranteed to do better than average. It’s like going out on
the golf course and shooting every round at par. How many golfers can do
better than that? Index funds provide a simple low-cost solution to
your investing problems.
If I’m reading this United States Golf Association chart correctly, golfing every round at par would make you a “scratch golfer” (close to a 0 handicap) and would place you in about the top 2% of all golfers. And extending the index investing-golf analogy, using index funds is the equivalent of being a “scratch golfer” without even having to practice, buy expensive golf clubs, or take lessons from pros, and you also get the added benefit of paying much lower green fees (or private club fees) than most golfers who do practice incessantly, invest in the best golf equipment and take private lessons at expensive private courses and country clubs! Sign me up for that deal!
Related: Here are 15 quotations below about index investing, collected from various sources, investors, economists, and fund managers:
1. “Building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic.” ~Bethany McLean of Fortune
2. “Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2% in favor of index funds.” ~John Bogle, founder of Vanguard
3. “No matter where we look, the message of history is clear. Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.” ~John Bogle, founder of Vanguard
4. “A number of smart people are involved in running hedge funds. But to a great extent, their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund.” ~Warren Buffett, Chairman, Berkshire Hathaway
5. “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” ~Warren Buffett, Chairman, Berkshire Hathaway
6. “Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.” ~Andrew Smithers and Stephen Wright, authors of Valuing Wall Street
7. “I own last year’s top-performing funds. Unfortunately, I bought them this year.” ~Anonymous
8. “After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding ‘no.’” ~Eugene Fama, Professor at University of Chicago and Nobel Economist
9. “Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (vs. an index fund) by incurring transaction costs.” ~Burton Malkiel, Professor, Princeton
10. “All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage. Unless you were fortunate enough to pick one of the few funds that consistently beat the averages, your research came to naught. Thereʹs something to be said for the dart‐board method of investing: buy the whole dart board.” ~Peter Lynch, Legendary Manager of Fidelity Magellan
11. “The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors. In fact, one of the reasons that actively managed equity funds underperform stock index funds is because they are spending so much money to advertise — money that otherwise would be invested on behalf of the mutual fund shareholders.” ~Internet Advisor, ʺThe Motley Fool ʺ
12. “If active and passive management styles are defined in sensible ways, it must be the case that: 1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and, 2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.” ~William F. Sharpe, Professor of Finance, Nobel Laureate
13. “Indexing is a marvelous technique. I wasnʹt a true believer. I was simply an ignoramus. Now I am a convert. Indexing is an extraordinary sophisticated thing to do. If people want excitement, they should go to the racetrack or play the lottery.” ~Douglas Dial, Portfolio Manager of the CREF Stock Account Fund, largest pension fund in America
14. “Index funds should outperform most other stock‐market investors. After all, investors, as a group, can do no better than the market, because collectively we are the market. Most investors, in fact, are destined to trail the market because we are burdened by investment costs such as brokerage commissions and fund expenses.” ~Jonathan Clements, Columnist, Wall Street Journal
15. “It’s unlikely that you’ll spot many dog-eared copies of A Random Walk floating amongst the Wall Street set (although bookshelves at home may prove otherwise). After all, a “random walk”–in market terms–suggests that a “blindfolded monkey” would have as much luck selecting a portfolio as a pro.” ~Amazon.com review of the 10th edition of Random Walk Down Wall Street.