For more than a decade now, Standard & Poor's has been contributing to the debate over active versus passive investing by producing its S&P Indices Versus Active Funds, or SPIVA, scorecards. These twice-yearly scorecards evaluate the evidence concerning the performance of actively managed funds relative to their benchmarks.
They show, year after year, that fewer active managers of U.S. domestic equity funds demonstrate persistent outperformance than would be randomly expected. The only conclusion to draw from this data is that past performance is not a reliable predictor of future performance.
Standard & Poor's has expanded the scope of its reports, as well as the scope of the active-versus-passive management debate, with the launch of its European scorecard. The just-released inaugural report examines year-end results for 2013, in addition to the prior three- and five-year periods. Here are some of the report's key findings about European equity funds:
- The majority of the euro-denominated, actively managed funds invested in European equities underperformed their benchmarks. More than three-quarters of the funds invested in eurozone equities also failed to keep pace with their respective benchmarks. (The eurozone is the area covered by the 18 European Union member states that have adopted the euro as their common currency and sole legal tender.)
- Longer-term performance figures don't favor actively managed funds. More than 60 percent of European equity funds and nearly 79 percent of eurozone equity funds underperformed their benchmarks over the five-year period.
- The results for international and global equities were unequivocal: Across all categories studied, actively managed funds failed to keep pace with their corresponding benchmarks. The pattern is also consistent across various time horizons. For example, 74 percent, 92 percent and 90 percent of actively managed funds underperformed over the one-year, three-year and five-year periods, respectively. The average actively managed fund's underperformance was -3.3 percent per year, -4.7 percent per year and -4.5 percent per year over the one-year, three-year and five-year periods, respectively.
- The results for emerging market funds dispel the myth that active management is successful in these "less efficient" markets. The significant majority of actively managed European emerging market funds underperformed their benchmark across all three time horizons. Over the one-year, three-year and five-year periods, 71 percent, 84 percent and 88 percent, respectively, of active emerging market funds underperformed their benchmarks. The average actively managed fund's underperformance was -0.4 percent per year, -1.8 percent per year and -3.5 percent per year over the one-year, three-year and five-year periods, respectively.
In short, S&P says the scorecard clearly shows "the overwhelming underperformance of actively managed funds relative to the benchmark" over medium- to long-term horizons.
It's important to note that all of the results discussed above are based on pretax returns. Given that the higher turnover of actively managed funds generally makes them less tax-efficient, and because taxes are often the highest expense for such funds, on an aftertax basis, the failure rates would likely be much higher.