The trouble with news reporting is that when something is no longer new, it’s no longer news.
That means we don’t hear about it.
Consider deaths from Covid-19 and smoking
I haven’t seen a single report, for instance, pointing out that deaths due to Covid-19 are similar to the number of deaths due to smoking over the same period. According to Google News, 1,006,566 Americans had died from the virus since it was first reported in January 2020 some 29 months ago.
Yet, according to the CDC, about 480,000 Americans die each year as a result of smoking. Over a two-year period that would be 960,000. And if we added the additional 200,000 that would have died between January and May, the deaths due to smoking would total 1,160,000.
One cause of death, however, was new. The other was really old.
The under-reported report
This kind of unbalanced reporting isn’t limited to health. It’s pretty much universal. A recent case in the world of investing is the publication of the semi-annual SPIVA report.
Oh, you missed it?
That’s no surprise. It was barely noted in the press.
Yet this report, now with 20 years of data, tells us something that every investor should know. The Standard and Poor’s Index Versus Active report has assiduously examined the proportion of actively managed mutual funds that have managed to beat the index by which they are measured.
The report has found, year after year, that the majority of managed mutual funds – you know, the ones with extremely well-paid management that like to claim profound skill and deep insight – fail to beat the index that describes the area in which their fund invests.
What SPIVA tells us — year after year after year
We’re not talking a coin toss here. We’re talking wipe-out.
The most recent report tells us that the darlings of recent years, the growth fund managers, failed utterly to beat the S&P 500 Growth index in 2021. By utterly, I mean 98.6 percent of them.
That should tell us something.
Worse, the longer the investment period, the greater the failure rate. While only 72 percent of all domestic managed equity funds underperformed the S&P 1500 Composite index over the last three years, 86 percent failed over 10 years and 90 percent failed over 20 years. The fail rate for international funds is almost as bad. Ditto, fixed-income funds.
Making bad bets
As a result, our tendency to put a high value on recent figures can lead us to believe that management has a shot at earning its keep. It’s a very bad bet. Only 38.46 percent of large cap value funds, for instance, underperformed their index in 2021. But over the last 10 years 89 percent failed. Similarly, while only 9.4 percent of investment-grade long-term bond funds failed to beat their index in 2021, a whopping 98 percent failed over the last 10 years.
The single largest reason that managed funds show up so poorly in the SPIVA studies is something called “survivor bias.” While services like Morningstar routinely rank funds that still exist, those figures ignore the number of funds that existed three, five or 10 years ago but have been quietly merged with another fund or simply buried in an unmarked grave.
The report notes, for instance, that about 5 percent of funds in all categories “were merged or liquidated” in 2021. The fatality rate is much higher over longer time periods. Nearly 70 percent of all domestic equity funds and 66 percent of all international funds disappeared over the last 20 years. And, yes, it’s pretty much the same for fixed income funds.
The odds are against selecting a winning managed fund
One implication is that most index funds are actually beating more managed funds than indicated in their Morningstar reports. Vanguard Total Stock Market Index ETF (ticker VTI), for instance, ranked at the 26th percentile over the 10 years ending March 31, according to Morningstar. But only 62 percent of large cap or all domestic funds survived over the period. Adjusting for survivor bias, Vanguard Total Stock Market Index ETF was actually in the top 16 percent, beating 84 percent of the competition that started the 10-year period.
This doesn’t mean, by the way, that you should ignore Morningstar reports. They are sliced bread for you and me. It just means that if index funds look good in those reports, which they almost always do, you can be certain that their actual performance against managed choices is even better.
Related columns:
Scott Burns, “Two days of truth in 365 days of snake oil,” 4/17/2020 https://scottburns.com/two-days-of-truth-in-365-days-of-snake-oil/
Scott Burns, “SPIVA, again and again and again,” 11/29/2019 https://scottburns.com/spiva-again-and-again-and-again/
Scott Burns, “Index Investing –it’s way more than a gentleman’s c,” 9/28/2018 https://scottburns.com/index-investing-its-way-more-than-a-gentlemans-c/
Scott Burns, “The Lessons of Couch Potato Investing,” 11/25/201https://scottburns.com/the-lessons-of-couch-potato-investing/
Scott Burns, “There is nothing quite like the Assurance of Failure,” 05/20/2012 https://scottburns.com/there-is-nothing-quite-like-the-assurance-of-failure/
Scott Burns, “Four Milestones for successful investing,” 12/09/2006 https://scottburns.com/four-milestones-for-successful-investing/
Sources and References:
Berlinada Liu, “SPIVA U.S. Year-End 2021, 3/16/2021 https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2021.pdf
Google Covid Map https://news.google.com/covid19/map?hl=en-US&gl=US&ceid=US%3Aen&pinned=%2Fm%2F09c7w0
CDC website, “Burden of Cigarette Use in the U.S.
Morningstar report on Vanguard Total Stock Market Index ETF https://www.morningstar.com/etfs/arcx/vti/performance
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns
(c) Scott Burns, 2022