A unique scorecard for the active versus passive debate

S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active Funds (SPIVA) U.S. Scorecard in 2002.

Over the years, we have built on more than a decade of experience publishing the report by expanding coverage into Canada, India, Japan, Australia, Latin America, and South Africa. While the report will not end the debate on active versus passive investing, we hope to make a meaningful contribution by examining market segments in which one strategy might work better than the other.

The SPIVA Europe Scorecard measures the performance of actively managed European equity funds denominated in euro (EUR), British pound sterling (GBP), and other European local currencies against the performance of their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. Last year, the range of fund categories covered in the SPIVA Europe Scorecard was expanded to include domestic equity funds from Italy, the Netherlands, Poland, Spain, Switzerland, and the Nordic region, with specific data for Denmark and Sweden.

Equity Funds Denominated in Euros (EUR)
Global equity markets, as measured by the S&P Global 1200, fell 1.74% over the past one-year period in euro terms, and European markets fared even worse, with the S&P Europe 350® decreasing 10.47% over the same period. The drab performance and heightened volatility in Europe were brought about by the uncertainty over the U.K. exiting the European Union as well as the adoption of a negative interest rate policy in Europe. Normally, these would be the ideal conditions in which active managers might be expected to outperform, as they could theoretically use their stock-picking skills to take advantage of the perceived discrepancies and manage the volatility in the market. However, our report indicates that euro-denominated active funds invested in pan-European equities underperformed their benchmarks across all time horizons analyzed. In terms of emerging market equities, performance was similarly lackluster, principally owing to unfavorable economic performance in China and other emerging countries.

There is a widely held belief that active portfolio management can be most effective in less efficient markets, such as emerging market equities, as these markets can provide managers the opportunity to exploit perceived mispricings. However, this view was not substantiated by our research, as active funds underperformed their benchmarks over all time horizons, with 96% of funds underperforming over the 10-year period.

In the U.S., the performance of equity markets was positive, albeit weaker than previous years. However, over 93% of U.S. active funds underperformed the S&P 500® over the one-year period. This poor performance continued over the longer term, as over 99% of active funds trailed the benchmark over the past 10 years.
The relationship between the size of funds (i.e., the amount of assets under management) and their success appears to be uncertain across different categories of funds. Results from Reports 3 and 4 highlight that asset-weighted returns were higher than equal-weighted returns in some, but not all, categories. Moreover, over the 10-year period, over 50% of euro-denominated active funds invested in pan-European equities were either liquidated or merged.

Funds Denominated in Pound Sterling (GBP)
With respect to GBP-denominated categories, actively managed funds invested in U.K. equities lagged their benchmarks in all market capitalization categories and across all time horizons studied. In addition, GBP-denominated funds invested in emerging, U.S., and international equities underperformed their corresponding benchmarks across all the time horizons studied.

Funds Denominated in Other European Local Currencies
Similar to the euro and pound sterling categories, all active funds denominated in other European local currencies underperformed their benchmarks over the 5- and 10-year periods, even if outperformance was achievable over a shorter time horizon.

Quartile Breakpoint Reports
Report 5 shows that while there was return dispersion over the one-year horizon, this dispersion dissipated over the longer term and fund returns generally reverted to their respective benchmarks.

Daniel Ung, CFA, CAIA, FRM – Director Global Research & Design – S&P Dow Jones Indices