Please give a nod of thanks to Aye M. Soe and Ryan Poirier. These two, both researchers at Standard and Poor’s, have been working tirelessly to produce an important but utterly thankless bit of research with monotonous, unchanging results.
I am referring, of course, to the little known SPIVA report.
Yes, you’ve probably never heard of it. That’s because the report is called the “Standard and Poor’s Index Versus Active Report.” It’s redone every six months and has been for years. You won’t see it mentioned in the big, glossy advertisements from any of the major mutual fund companies. Nor will it be mentioned in any of the hot-stock TV shows that identify the newest and greatest opportunity to make lots of money, right now.
The big report you’ve never seen mentioned on TV
Why is that so? Simple. The SPIVA report regularly measures the percentage of managed mutual funds that actually beat their index, including an adjustment for all the funds that have quietly been closed, buried, and taken out of the performance measurements.
That adjustment for what statistical types call “survivorship bias” is important. Why? Because hordes of glorious new funds that are heavily promoted sources of investment salvation this year won’t exist three, five, or ten years from now. In spite of that, Morningstar analystsrecently reported that new mutual funds received a whopping 73 percent of all new money going into funds.
Skeptics should consider a few figures. Only 57 percent of all the mutual funds investing in domestic stocks ten years ago are still in business today. While survivorship figures are better for some fund categories, it’s not surprising that fund closings aren’t advertised.
So, go ahead, “die trying.”
How does managed money do when we include all the funds that literally “die trying”? Over the last ten years 87.47 percent of all managed funds trailed their benchmarks. The figures for one, three and five years were about the same, or worse. Whether you examine funds categorized by market cap, value, growth, or some combination, under-performance is the rule.
The figures are similar for international equity funds and for bond funds of all kinds. The raw truth is that it’s difficult to beat the market, any market.
But hope and delusion spring eternal. Promising funds are found with remarkable frequency, and on a schedule that matches the publication dates for weekly, biweekly, and monthly publications.
Follow the data
As I write this, I worry that some young readers will rush to conclude that columnist Burns is a cynic. I’m not. I just believe that data can become information if we treat it with respect. And information can become wisdom.
The data on mutual fund performance told me, back in 1991, exactly what the SPIVA reports continue to verify every six months: Paying managers to beat an index is good for them, but harmful to you and me. That’s why I offered readers the first Couch Potato portfolio in 1991.
The idea was simple: A portfolio that anyone could build and manage. A portfolio whose expenses have declined year after year. Today, you can manage your basic Couch Potato portfolio for less than one-tenth of one percent.
The basic recipe? Put half your money in a total domestic stock market fund or ETF, then put the other half in a total domestic bond market fund or ETF. Rebalance once a year, or when you add new money. That’s it.
How would you have done?
Performance of the basic Couch Potato portfolio
Nicely. Over the 40 years closed at the end of 2015, the basic Couch Potato would have returned an annualized 9.78 percent— its best performance. Over a 15-year period ending the same time it would have returned an annualized 5.69 percent, its worst performance. A typical performance period would have provided a return of 8 to 9 percent, annualized.
What will future returns be? That’s unknown.
But we do know one thing, something that has been proven year after year. Whatever investments return in the future, low-cost index fund investing will blow away high cost managed investing. You can count on it.
On the web:
Aye M. Soe, CFA and Ryan Poirier, “SPIVA U.S. Scorecard,” 6/30/2016 https://us.spindices.com/documents/spiva/spiva-us-mid-year-2016.pdf
Lee Davidson and Madison Sargis, “The Rise and Fall of New Funds,” Morningstar.com, 11/20/16 http://news.morningstar.com/articlenet/article.aspx?id=776597
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.
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(c) A. M. Universal, 2016