Active vs Passive: It’s Worse Than You Thought

S+P has been publishing since 2002 its’ SPIVA report which compares the performance of actively managed funds as compared to their relevant indices. The results consistently show significant underperformance by actively managed mutual funds over periods of 5, 10 and 15 years, the results across virtually all categories of stock and bond funds particularly over longer time frames is for the active funds to underperform.

Many investors are interested not only in their investment returns but also the risk adjusted returns. In a recent study researchers at S+P examined the risk adjusted returns of actively managed stock and bond funds vs their relevant indices (for example large cap value funds vs the S+P500 value index).

The study found that the overwhelming percentage of actively managed stock funds underperformed their relevant indices over 5, 10, and 15-year periods. Not surprisingly, fees played a significant role in determining the underperformance. This can be seen in the tables below which show performance gross and net of fees.

In the case of fixed income funds fees were the key determinant of underperformance Bond funds in several categories outperformed gross of fees but when adjusted for fees their performance was much poorer.

The study destroys another of the myths peddled by the active fund management industry. The claim that indexing is “riskier” and that active managers can successfully reduce risk in portfolios compared to indices doesn’t stand up to scrutiny.