Active Versus Passive Scorecard: Emerging Markets Small-Cap Funds Are Big Active Winners


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Barry Ritholtz , From Bloomberg,

Twice a year, Standard & Poor’s releases a “SPIVA Scorecard” — a report comparing the performance of active managers versus three passive indexes. The S&P 500 large caps, S&P MidCap 400 and S&P SmallCap 600 are pitted against the median returns of active managers.

In the most recent report, the trailing 12 months returns for these indexes were 20.60 percent, 25.18 percent and 25.18 percent, respectively (latest data is as of June 30, 2013).

Gains in major indexes were not duplicated by the universe of actively-managed funds. As is typical, most active managers underperformed their respective benchmarks. S&P notes that “59.58% of large-cap funds, 68.88% of mid-cap funds and 64.27% of small-cap funds underperformed their respective benchmark indices” over the trailing 12 months. Performance of active managers was equally unfavorable over three- and five-year periods. Most International equity did no better.

The three-year data is especially damning: In the universe of “All Domestic Equity Funds,” 78.90 percent were outperformed by the S&P Composite 1500. Active managers did better over five years, with 72.14 percent being outperformed.

Three kinds of funds did especially poorly over three years: Large-Cap Growth Funds (active outperformed by passive in 92.11 percent of the funds), Mid-Cap Growth Funds (passive outperformed 92.86 percent) and Real Estate Funds (a whopping 95.07 percent outperformance).

The one notable bright spot among active managers: Emerging markets small-cap funds. They have outperformed for a number of years. That suggests that managers can find Alpha by fishing in waters where there are fewer commercial vessels with trawling nets at work.

The SPIVA Scorecard tends to show much worse performance than other active versus passive studies. My knee-jerk inclination was to assume S&P, a purveyor of passive indexes, was biased. However, a closer look at their statistical work shows they are correcting for biases that typical comparisons omit.

The biggest correction appears to be for Survivorship bias. S&P corrects for those funds that were liquidated (or merged) over the course of a year. Studies that fail to account for funds that close will boost the apparent returns of the set of active managers. Accounting for the entire set of active managers — not just those that succeed and survive — eliminates survivorship bias.

The data strongly shows the advantages of passive indexing. Where many people misinterpret it is in assuming that it means there is no role of active management. That’s the wrong interpretation. There is a place in portfolios for active managers — but it’s probably a smaller slice of holdings than many investors have currently.

S&P Indices Versus Active Funds (SPIVA) Scorecard Mid-Year 2013

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