SPIVA U.S. Year-End 2016 Scorecard - S&P Dow Jones Indices

[Pages:34]RESEARCH SPIVA

CONTRIBUTORS

Aye M. Soe, CFA Managing Director Global Research & Design aye.soe@

Ryan Poirier, FRM Senior Analyst Global Research & Design ryan.poirier@

SPIVA? U.S. Scorecard

SUMMARY

Starting with this scorecard, we will report the relative outperformance or underperformance of actively managed funds against their respective benchmarks over a 15-year investment horizon. The longer time horizon provides a complete market cycle to measure the effectiveness of managers across all categories.

Given that market conditions can impact managers' performance from year to year, we also added rolling three-year relative performance figures from 2003 through 2016, calculated on a semiannual basis across major domestic and international equity categories.

The U.S. equity market finished 2016 on a strong run. Even though the S&P 500?, S&P MidCap 400?, and S&P SmallCap 600? all posted 10% losses by mid-February 2016, the indices rallied back to finish the year on a positive note, posting 11.96%, 20.74%, and 26.56%, respectively. Approximately one-half of the year's total return for the S&P 500 and S&P MidCap 400 came within the last two months of the year, while almost two-thirds of the S&P SmallCap 600's gains came from the same period.

During the one-year period ending Dec. 31, 2016, 66% of large-cap managers, 89.37% of mid-cap managers, and 85.54% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively. These figures are on par with the one-year performance figures reported in June 2016, with the exception of large-cap managers, who faired relatively better.

Figures over the five-year period did not change significantly from the SPIVA U.S. Mid-Year 2016 Scorecard.1 During the five-year period ending Dec. 31, 2016, 88.3% of large-cap managers, 89.95% of midcap managers, and 96.57% of small-cap managers underperformed their respective benchmarks.

1 For more information, see the SPIVA U.S. Mid-Year 2016 Scorecard.

Experience the Active vs. Passive Debate on a Global Scale on INDEXOLOGY?.

SPIVA U.S. Scorecard

Year-End 2016

Given that active managers' performance can vary based on market cycles, the newly available 15-year data tells a more stable narrative. Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.

During the same 15-year period, large-cap value managers fared better than their growth counterparts.

International markets finished the year on a positive note. Global large caps, as measured by the S&P Global 1200, and emerging markets, as measured by the S&P/IFCI Composite, both rallied throughout the year to end with gains of 8.89% and 10.79%, respectively.

Across all time horizons, the majority of managers across all international equity categories underperformed their benchmarks.

In December 2016, the U.S. Federal Reserve raised the interest rate for the second time in a decade. Managers investing in intermediate- and short-term credit fared the best over the oneyear period, with only 19.75% and 26.61% underperforming, respectively. The same trend held through the five-year period. The 10- and 15-year periods proved to be difficult for all credit managers.

Trends seen at mid-year 2016 continued throughout the remainder of the year. Spreads continued to narrow, which tested high-yield bond market managers. More than 94% of managers in this category ended the one-year period lagging the index's performance of 17.13%.

The continued strength in the high-yield bond market had a positive spillover effect to the leveraged loan sector. The S&P/LSTA U.S. Leveraged Loan 100 Index posted a gain of 10.88% year-over-year. This outperformance proved difficult for actively managed senior loan funds over the one-year period, with nearly 82% of funds underperforming the benchmark.

Funds disappear at a significant rate. Over the 15-year period, more than 58% of domestic equity funds were either merged or liquidated. Similarly, almost 52% of global/international equity funds and 49% of fixed income funds were merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis.

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SPIVA U.S. Scorecard

Year-End 2016

A UNIQUE SCORECARD FOR THE ACTIVE VERSUS PASSIVE DEBATE

There is nothing novel about the index versus active debate. It has been a contentious subject for decades, and there are few strong believers on both sides, with the vast majority of market participants falling somewhere in between. Since its first publication 15 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. For more than a decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.

Beyond the SPIVA Scorecard's widely cited headline numbers is a rich data set that addresses issues related to measurement techniques, universe composition, and fund survivorship that are far less frequently discussed, but are often far more fascinating. These data sets are rooted in the following fundamental principles of the SPIVA Scorecard, with which regular readers will be familiar.

Survivorship Bias Correction: Many funds might be liquidated or merged during a period of study. However, for someone making an investment decision at the beginning of the period, these funds are part of the opportunity set. Unlike other commonly available comparison reports, SPIVA Scorecards account for the entire opportunity set--not just the survivors--thereby eliminating survivorship bias.

Apples-to-Apples Comparison: Fund returns are often compared to popular benchmarks such as the S&P 500, regardless of size or style classification. SPIVA Scorecards avoid this pitfall by measuring a fund's returns against the returns of a benchmark appropriate for that particular investment category.

Asset-Weighted Returns: Average returns for a fund group are often calculated using only equal weighting, which results in the returns of a USD 10 billion fund affecting the average in the same manner as the returns of a USD 10 million fund. An accurate representation of how market participants fared in a particular period can be ascertained by calculating weighted average returns where each fund's return is weighted by net assets. SPIVA Scorecards show both equal- and asset-weighted averages.

Style Consistency: SPIVA Scorecards measure style consistency for each style category across different time horizons. Style consistency is an important metric because style drift (the tendency of funds to diverge from their initial investment categorization) can have an impact on asset allocation decisions.

Data Cleaning: SPIVA Scorecards avoid double counting multiple share classes in all count-based calculations, using only the share class with greater assets. Since this is meant to be a scorecard for active managers, index funds, leveraged and inverse funds, and other index-linked products are excluded.

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SPIVA U.S. Scorecard

Year-End 2016

Annual League Table

We have often written about the lack of consistency in results when viewing over a shorter horizon. The annual league table is evidence of that, and it shows the yearly match up of the active funds versus indices in the major U.S equity categories (see Exhibit 1).

Exhibit 1: Annual League Table

FUND

BENCHMARK

CATEGORY INDEX

2001

2002

2003

(% OF ACTIVE FUNDS OUTPERFORMED BY THEIR BENCHMARK) 2004 2005 2006 2007 2008 2009 2010 2011 2012

2013

2014

All Domestic Funds

S&P 1500

54.87 58.34 48.01 51.43 42.26 68.02 48.90 64.91 40.68 48.28 84.65 64.91 43.26 86.89

All LargeCap Funds

S&P 500

65.16 67.73 75.44 68.79 48.81 68.38 44.63 55.95 48.40 65.88 82.24 62.66 54.56 86.73

All Mid-Cap Funds

S&P MidCap 400

67.64 74.43 51.70 64.56 73.63 44.77 45.77 75.73 55.69 73.29 68.59 79.85 37.11 66.05

All SmallCap Funds

S&P SmallCap 600

53.97 67.54 34.63 83.84 60.95 62.53 45.98 83.30 30.69 53.95 85.81 66.28 67.77 71.96

All Multi-Cap Funds

S&P 1500

54.73 54.02 49.21 49.38 37.14 68.77 45.97 70.14 39.30 60.39 83.88 65.22 46.84 81.62

Large-Cap Growth Funds

S&P 500 Growth

94.80 83.13 48.36 44.08 37.96 93.93 27.14 90.67 36.81 50.98 95.90 45.62 41.08 95.61

Large-Cap Core Funds

S&P 500

77.03 66.55 85.29 82.91 56.16 81.09 43.50 52.26 50.55 76.61 83.21 66.59 57.65 80.38

Large-Cap

S&P 500

Value Funds Value

30.77 34.63 85.98 86.47 54.11 80.28 45.79 24.45 45.71 70.55 54.28 85.05 64.86 77.78

Mid-Cap Growth Funds

S&P MidCap 400 Growth

87.96 86.24 35.75 64.16 79.67 27.96 41.97 90.95 54.01 84.11 76.53 86.81 34.48 55.37

Mid-Cap Core Funds

S&P MidCap 400

80.00 70.42 54.74 57.27 66.34 32.04 60.78 60.18 70.75 86.54 65.66 78.57 42.96 58.65

Mid-Cap

S&P MidCap

Value Funds 400 Value

47.42 63.64 68.42 53.09 69.14 36.90 57.83 68.00 47.33 57.14 67.61 73.47 40.85 71.43

Small-Cap

S&P

Growth

SmallCap

76.64 97.14 26.88 94.71 78.06 50.75 40.80 94.84 31.34 62.25 94.12 62.91 55.25 63.98

Funds

600 Growth

Small-Cap Core Funds

S&P SmallCap 600

57.78 67.27 34.88 79.47 58.33 56.34 55.51 82.07 33.22 58.63 86.01 68.68 77.74 66.92

Small-Cap Value Funds

S&P SmallCap 600 Value

39.07 29.93 48.08 71.76 45.24 71.26 39.36 72.07 25.17 41.98 81.82 61.54 78.81 94.07

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2016. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

2015 74.03 65.39 57.18 71.79 70.10 47.55 73.75 61.52 79.68 68.18 34.38 87.50

77.46

45.04

2016 60.49 66.00 89.37 85.54 74.88 89.79 74.56 77.99 94.58 90.65 96.77 95.96

89.47

88.89

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SPIVA U.S. Scorecard

Year-End 2016

Rolling Semiannual 3-Year Relative Performance

Given that market conditions can affect managers' performance on a year-over-year basis, it is more meaningful to examine the results on a rolling basis. We show the three-year relative performance of managers across major domestic and international equity categories in Exhibit 2. The figures are calculated on a rolling semiannual basis.

Exhibit 2: Percentage of U.S Equity Funds Outperformed by Benchmark ? Based on Rolling 3-Year

Returns

100

All Domestic Funds

100

All Large-Cap Funds

75

75

50

50

25

25

0 2003 100

2005

2007 2009 2011

All Mid-Cap Funds

2013

2015

0 2003 100

2005 2007 2009 2011 2013

All Small-Cap Funds

2015

75

75

50

50

25

25

0 2003 100

2005

2007 2009 2011

All Multi-Cap Cap

2013

2015

0 2003 100

2005 2007 2009 2011 2013

U.S. Real Estate Funds

2015

75

75

50

50

25

25

0

0

2003 2005 2007 2009 2011 2013 2015

2003 2005 2007 2009 2011 2013 2015

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2016. Past performance is no guarantee of future results. Charts are provided for

illustrative purposes.

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SPIVA U.S. Scorecard

Year-End 2016

Exhibit 3: Percentage of U.S Equity Funds Outperformed by Benchmark ? Based on Rolling 3-Year Returns

100

Large-Cap Growth

100

Large-Cap Core

100

Large-Cap Value

75

75

75

50

50

50

25

25

25

0

0

0

100

Mid-Cap Growth

75

50

25

0

100

Mid-Cap Core

75

50

25

0

100

Mid-Cap Value

75

50

25

0

100

Small-Cap Growth

75

50

25

0

100

Small-Cap Core

75

50

25

0

100

Small-Cap Value

75

50

25

0

100

Multi-Cap Growth

75

50

25

0

100

Multi-Cap Core

75

50

25

0

100

Multi-Cap Value

75

50

25

0

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2016. Past performance is no guarantee of future results. Charts are provided for illustrative purposes.

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SPIVA U.S. Scorecard

Year-End 2016

Exhibit 4: Percentage of International Equity Funds Outperformed by Benchmark ? Based on Rolling 3Year Returns

100

International Funds

100

Global Funds

75

75

50

50

25

25

0 2003 100

2005 2007 2009 2011 2013

International Small Cap Funds

2015

0 2003 100

2005 2007 2009 2011 2013

Emerging Markets Funds

2015

75

75

50

50

25

25

0 2003

2005

2007

2009

2011

2013

2015

0 2003 2005 2007 2009 2011 2013 2015

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2016. Past performance is no guarantee of future results. Charts are provided for illustrative purposes.

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SPIVA U.S. Scorecard

Year-End 2016

REPORTS

Report 1: Percentage of U.S. Equity Funds Outperformed by Benchmarks

FUND CATEGORY

COMPARISON INDEX

1-YEAR (%) 3-YEAR (%)

All Domestic Funds

S&P 1500

60.49

92.91

5-YEAR (%) 85.82

10-YEAR (%) 82.87

15-YEAR (%) 82.23

All Large-Cap Funds

S&P 500

66.00

93.39

88.30

84.60

92.15

All Mid-Cap Funds

S&P MidCap 400

89.37

94.21

89.95

96.03

95.40

All Small-Cap Funds

S&P SmallCap 600

85.54

95.69

96.57

95.64

93.21

All Multi-Cap Funds

S&P 1500

74.88

91.88

87.19

89.31

88.15

Large-Cap Growth Funds S&P 500 Growth

89.79

95.62

84.80

95.22

95.18

Large-Cap Core Funds

S&P 500

74.56

93.35

87.91

89.43

97.48

Large-Cap Value Funds Mid-Cap Growth Funds Mid-Cap Core Funds Mid-Cap Value Funds Small-Cap Growth Funds Small-Cap Core Funds Small-Cap Value Funds Multi-Cap Growth Funds

S&P 500 Value

S&P MidCap 400 Growth

S&P MidCap 400

S&P MidCap 400 Value S&P SmallCap 600 Growth

S&P SmallCap 600

S&P SmallCap 600 Value

S&P 1500 Growth

77.99 94.58 90.65 96.77 95.96 89.47 88.89 85.32

88.56 92.61 93.28 90.00 98.11 95.13 92.74 93.50

91.48 92.18 90.18 89.69 97.64 97.37 94.03 89.50

64.49 97.93 98.04 89.16 98.01 94.32 91.75 91.28

78.54 97.35 98.59 89.77 99.43 94.64 80.71 88.35

Multi-Cap Core Funds

S&P 1500

74.48

92.84

87.78

89.40

88.82

Multi-Cap Value Funds

S&P 1500 Value

71.20

82.20

79.86

81.05

86.75

Real Estate Funds

S&P BMI US REITs

84.04

82.42

85.15

83.91

81.82

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2016. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

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