How Much Do Fees Affect The Active Versus Passive Debate?

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SPIVA® Institutional Scorecard – How Much Do Fees Affect the Active Versus Passive Debate? by S&P Global Market Intelligence

Executive Summary

  • In this report, we examine the impact of fees on performance for both retail mutual funds and institutional managed accounts, using gross-of-fees returns.
  • Our findings show that within domestic equity, the majority of managers in nearly every category underperformed their respective benchmarks over the five-year horizon, for both retail funds and institutional accounts.
  • Over 76.23% of mutual fund managers and 85.81% of institutional accounts in the large-cap equity space underperformed the S&P 500®.
  • Similarly, in the mid-cap space, 65.81% of mutual funds and 64.71% of institutional accounts underperformed the S&P MidCap 400®.
  • In the small-cap space, over 80% of managers on both fronts underperformed the S&P SmallCap 600®. The findings in the small-cap space dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management.
  • Managers investing in international equities and international small-cap equities fared better than their benchmarks when measured using gross-of-fees returns. The findings are consistent for mutual funds and institutional accounts.
  • In fixed income, the findings were mixed depending on the market segment. Institutional managers showed strength in U.S. spread products such as mortgage-backed securities (MBSs), investment-grade corporate bonds, and leveraged loans, outperforming their respective benchmarks.
  • The municipal bond market was the only space in which we saw a significant performance divergence between institutional accounts and mutual funds directionally.

Management Fees, Active Management, Passive Management

Undeniably, fees play a major role in the active versus passive debate. After subtracting fees, returns from active management tend to be less than those from passive management, as the latter costs less.1 Within active management, it is widely understood and has been documented that fees can vary meaningfully depending on the type of investor.2 In general, retail investors tend to pay higher advisory and management fees than institutional investors.3 Institutional investors have the option to negotiate fees directly with asset managers based on the size of a mandate and how many strategies may already exist with one manager. Retail investors, on the other hand, lack such bargaining power.


Since 2002, S&P Dow Jones Indices has been publishing the S&P Indices Versus Active (SPIVA) U.S. Scorecard. The scorecard measures the performance of actively managed equity funds, investing in domestic and international equity, as well as fixed income funds against their respective benchmarks. The University of Chicago’s Center for Research in Security Prices (CRSP) Survivor-Bias-Free US Mutual Fund Database serves as the underlying data source for the scorecard. As the CRSP database consists of publicly traded open-ended mutual funds, the fee structure primarily reflects retail products rather than institutional accounts.

This report attempts to answer three questions that are pertinent to the active versus passive debate.

  1. When measured on a gross-of-fees basis, do institutional asset managers deliver relative outperformance over their respective benchmarks?
  2. Similarly, do mutual funds, when measured on a gross-of-fees basis, outperform their respective benchmarks?
  3. For particular asset classes and sub-asset classes, do institutional managers fare better than their retail fund counterparts when measured on a gross-of-fees basis?

To answer these questions, we report the relative performance of U.S. equity and fixed income asset managers for institutional accounts4 using composite returns from eVestment Alliance,5 a provider of investment data and analytics for the institutional asset management industry. It should be noted that unlike the publicly traded mutual fund performance data, the data from eVestment relies on self-reporting by managers. Relative performance for retail funds on a gross-of-fees basis is computed by adding back the annual expense ratio to the net-of-fees returns. Appendix A contains detailed mapping of various investment strategies to their groups.

In addition, we compare the relative performance of open-ended mutual funds—using both net-of-fees and gross-of-fees returns—against institutional accounts using gross-of-fees returns. We report the figures for domestic equity, international equity, as well as fixed income categories.

By producing this report, we aim to provide the institutional community with the ability to judge managers’ true skills without the possible distortions that fees may create on performance. Including mutual funds—on both a net and gross performance basis—with institutional accounts also allows readers to see if fees make any meaningful difference in a particular asset class for a certain type of market participant.

This report also aims to address the notion that benchmarks are not directly investable and do not incur costs, thereby making any performance comparison of active funds against their benchmarks not “apples-to-apples.” By comparing retail mutual funds and institutional accounts on a gross-of-fee basis against their respective benchmarks, we eliminate any possibility that fees are the sole contributor to a given manager’s underperformance.

This report is organized as follows. In Section I, we highlight the relative performance of retail funds and institutional accounts against their respective benchmarks for equity and fixed income categories. Section II replicates the headline SPIVA U.S. Scorecard using only institutional accounts, detailing related metrics such as survivorship, style consistency, asset-weighted versus equal-weighted performance figures, and quartile breakpoints.

Section I: Percentage Of Retail Funds And Institutional Accounts Underperforming Their Benchmarks

Domestic Equity

Across various categories within the domestic equity space, the overwhelming majority of active managers, both retail and institutional, lagged their respective benchmarks. Overall findings suggest that on a gross- or net-of-fees basis, the U.S. equity space poses meaningful challenges for active managers to overcome.

Real estate investment trusts (REITs) is the only category in which active management outperformed the benchmark, on both retail and institutional fronts.

Management Fees, Active Management, Passive Management

International Equity

In the non-U.S. equity space, we find managers investing in large and small international equities delivered higher returns than their respective benchmarks. This finding is quite pronounced in the international small-cap space. Observations from previous SPIVA U.S. Scorecards also show that international small-cap equity is one area of international equity investing where active management has fared quite well historically.

Managers investing in emerging markets equities, which have traditionally been thought to be one area where active management can add value, draw parity with passive indices. Nearly one-half of these managers delivered higher excess returns than the broad-based benchmark.

Management Fees, Active Management, Passive Management

Fixed Income

For fixed income, we present the performance of retail funds separate from institutional accounts due to classification nuances. The CRSP US Survivor-Bias-Free Mutual Funds Database adopted style and objective codes from the Lipper objective codes after 1998. Lipper objective codes classify funds by sector, maturity, and credit quality, whereas the eVestment Universe groups fixed income strategies mostly by sector and maturity. While it is reasonably straightforward to map sector funds between CRSP and eVestment, a good amount of subjectivity is required in mapping them for composites and composites with various maturity slices.

The results show that institutional managers performed better in the global high-yield (hedged) category as well as in U.S. spread products such as MBSs, investment grade, and leveraged loans. However, the data indicates that managers cannot beat the benchmark when it comes to U.S. government bonds.

In emerging market debt, managers showed better performance in the U.S.-denominated corporate debt space. However, few managers were able to beat the benchmark in the local currency space, possibly indicating the challenge of actively managing emerging market currency exposure.

Management Fees, Active Management, Passive Management

Management Fees, Active Management, Passive Management

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