One of my favorite investment research articles comes out only twice a year. It’s the SPIVA report, Standard and Poor’s regular examination of how managed funds have done relative to the index they aim to beat. The report findings have gotten pretty repetitive since I first wrote about it in 2006. (Check the column collection below.)
What’s that finding?
Managed mutual funds are a loser’s game.
Unfortunately, the message gets news attention only when those two reports are released. But the snake oil folks are out there banging their drums every single day, all day, all year.
Selling the snake oil
Who are the snake oil folks? Well, they are the mutual fund companies, for starters. They have a vested interest in ignoring the long history of underperformance that is an inevitable part of owning the vast majority of managed mutual funds. They sell gobs of wishful thinking and people pay dearly for it.
After the mutual fund companies (and don’t forget the insurance companies that offer mutual funds), we have the co-dependent co-conspirators, the glossy personal finance press that routinely “finds” funds that are particular opportunities.
Together, they work hand in glove to promote hope in the highly improbable.
Measuring highly improbable
So, before we have another news cycle, please consider these findings from the latest SPIVA report.
- 2019 was a great year for investing in U.S. equities. Yet 70 percent of all domestic equity funds trailed the S&P Composite 1500 Index. There have been only three years since 2001 in which more managed funds trailed the index.
- Among the funds that invest in the largest domestic companies, 71 percent failed to beat the S&P 500. It was the tenth consecutive year that a majority of funds failed to beat the index.
- It gets worse when you examine returns over longer periods of time. The SPIVA scorecard, for instance, tracks 18 different categories of domestic funds. In 2019, a majority of managed funds beat their index in nine of those 18 categories. But over the last three years a majority of managed funds beat their index in only four of 18 categories.
- It gets even worse when you examine a longer time period. In the five, 10- and 15-year periods the score is zero for 18. Over the last 10 years the best performing category for managed funds was Mid-Cap Growth funds. In that category 78.3 percent of funds failed to beat their index. Yes, I said “best.” Across all domestic stock fund categories 89.3 percent failed to beat their index.
- Things weren’t much better in international investing. Of the four categories tracked by Standard and Poor’s, only one had a majority of managed funds beating their index. In the longer three-, five-, 10- and 15-year periods the score was zero for four.
- The same dismal attrition applies to managed fixed-income funds. For the last year a majority of managed funds beat their index in six of 13 categories. By the fifth year the score was only two of 13 categories. It was zero of 13 by the 15-year period. In one category, long-term government bond funds, the very best performance in any of the five time periods was stunning. A whopping 2.04 percent of managed funds beat their index.
An industry too well paid to be thoughtful
This is the kind of data that causes thoughtful people to pause and re-examine what they are doing for a living. But I suspect that the big dogs are being paid so well that reflection is difficult.
So it’s up to you and me to do the thinking.
You have a decision to make
The message in the data is simple. If you’re old enough to have a job and save money for your future, you’re likely to be doing it for a long time. Far longer than 10 or 15 years. Whether you invest in domestic stocks, international stocks or any form of fixed-income fund, you’ve got an easy decision:
- Invest in low-cost index funds knowing that you’ll do better than 90 percent of the heavily marketed managed funds alternative.
OR…
- Invest in higher-cost managed funds, and bet your security and retirement on a 1-in-10 longshot.
No one should need to think too long about that.
Related columns:
Scott Burns, “SPIVA – again and again and again,” 11/29/2019 https://scottburns.com/spiva-again-and-again-and-again/
Scott Burns, “The Simplicity Manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/
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,” 11/25/2016 https://scottburns.com/the-lessons-of-couch-potato-investing/
Scott Burns, “The missing bullet holes problem,” 11/15/2015 https://scottburns.com/the-missing-bullet-holes-problem/
Scott Burns, “The conspiracy for failure in 401(k) plans,” 08/23/2013 https://scottburns.com/the-conspiracy-for-failure-in-401k-plans/
Scott Burns, “There is nothing quite like the assurance of failure,” 05/18/2012 https://scottburns.com/there-is-nothing-quite-like-the-assurance-of-failure/
Scott Burns, “It’s time for plan B,” 05/01/2009 https://scottburns.com/its-time-for-plan-b/
Scott Burns, “Four milestones for successful investing,” 12/09/2006 https://scottburns.com/four-milestones-for-successful-investing/
Sources and References:
Berlinda Liu, “SPIVA Year-End 2019 Scorecard, Active Funds Continued to Lag,” 4/8/2020, https://www.spglobal.com/en/research-insights/articles/spiva-u-s-year-end-2019-scorecard-active-funds-continued-to-lag
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, Santa Barbara marina, 2020
(c) Scott Burns, 2020