The argument over passive investing versus active investing has been raging for decades, and frankly, the matter is not likely to be completely resolved in our lifetimes. However, on the basis of a new report from S&P Dow Jones Indices (SPIVA U.S. Scorecard Mid-Year 2014), it can be conclusively stated that passive investing has outperformed active investing overall across nearly all sectors over the last one, three and five year periods.
U.S. domestic equity markets were on a roll from end of June 2013 to end of June 2014. The S&P 500, S&P MidCap 400 and S&P SmallCap 600 were all up impressively at 24.61%, 25.24% and 25.54%, respectively.
That said, the large majority of active domestic equity funds did not produce returns above their respective benchmark. Only the managers of multi-cap value funds and real estate funds on average produced returns above their benchmark; most managers across all other categories underperformed the benchmark, some substantially underperforming. The Mid-2014 SPIVA Scorecard data shows that 59.78% of large-cap managers, 57.84% of mid-cap managers and 72.79% of small-cap managers underperformed their benchmarks during the 12-month period.
Passive Investing beats active investing over the last five years
The Mid-2014 SPIVA U.S. Scorecard notes that the prior five years have seen a rare combination of a strong rebound in domestic equity markets and low-volatility. This combination has made for rough sledding for U.S. equity fund managers, given that over 70% of them across all capitalization and style categories were unable to produce returns above their respective benchmarks.
Emerging market funds disprove another active investing myth
The current SPIVA U.S. Scorecard highlights that emerging markets equities returned to positive territory over the past 12 months, and the trading during the year was marked by notable volatility, wide return dispersion and active management opportunities.
Of interest, the data from the scorecard dispel the idea active investors fare better in “less efficient” markets. “It is often believed that in less efficient markets, such as emerging markets equities, active investing works better than passive investing because of its ability to take advantage of perceived mispricings. The results for emerging market funds dispel this myth, as the majority of funds underperformed their benchmark across all three time horizons measured.”
H/T Johanna Bennett of Barron’s