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Risk-Adjusted SPIVA® Scorecard Year-End 2017

Persistence Scorecard: Latin America May 2018

SPIVA® Canada Year-End 2017

SPIVA® South Africa Year-End 2017

SPIVA® India Year-End 2017

Risk-Adjusted SPIVA® Scorecard Year-End 2017

EXECUTIVE SUMMARY

  • Modern portfolio theory (MPT) states that expectations of returns must be accompanied by risk or variation around the expected return. It assumes that higher risk should be compensated, on average, by higher returns.
  • Beyond relative performance of funds, market participants are also interested in the risks taken to achieve those returns. This motivated us to examine the performance of actively managed funds on a riskadjusted basis.
  • Critiques of passive investing often argue that indices are not risk managed, unlike active management. Therefore, our study aims to understand whether actively managed funds are able to generate higher risk-adjusted returns than their corresponding benchmarks.
  • We used the standard deviation of monthly returns, over a given period, to define and measure risk. We used net of fees and gross of fees returns in our calculation of risk. Our goal was to establish whether risk or fees affected managers’ relative performance versus the benchmark.
  • We used the return/risk ratio to evaluate managers’ risk-adjusted performance. To make our comparison relevant, we also adjusted the returns of the benchmarks used in our analysis by their volatility.
  • Our analysis showed that on a risk-adjusted basis, the majority of actively managed domestic and international equity funds underperformed the benchmarks when using net of fees returns. However, when gross of fees returns were used, managers in certain categories outperformed the benchmarks.
  • In fixed income, we found that actively managed bond funds outperformed their benchmarks when gross of fees returns were used. The results highlighted that fees negatively affected active bond funds’ performance.


    • INTRODUCTION

    MPT, introduced by Harry Markowitz (1952), Jack Treynor (1962), William Sharpe (1964), and John Lintner (1965), states that the expectation of returns must be accompanied by risk—the variation (or volatility) around the expected return. MPT assumes that higher risk should be compensated, on average, by higher returns.

    We applied the same principle to active managers’ performance. Since its launch in 2002, the SPIVA Scorecard has looked at the relative performance of actively managed equity and fixed income funds against their respective benchmarks across different regions. Beyond the relative performance of funds, market participants are also interested in the risks taken to achieve those returns. This motivated us to examine the performance of actively managed funds on a risk-adjusted basis.

    Moreover, critiques of passive investing often argue that indices are not risk-managed, unlike active management. Previous research by S&P Dow Jones Indices revealed that active funds typically had higher risk than comparable benchmarks and relative fund volatility tended to be persistent (Edwards et al. 2016).

    Therefore, our study seeks to establish whether actively managed funds are able to generate higher risk-adjusted returns than their corresponding benchmarks over a long-term investment horizon.

    As with any analysis involving risk-adjusted performance, it is important to define risk and how to measure it. In our analysis, we used the standard deviation of monthly returns over a given period to define and measure risk. The monthly standard deviation was annualized by multiplying it by the square root of 12.

    The risk/return ratio looks at the relationship and the trade-off between risk and return. All else equal, a fund with a higher ratio is preferable since it delivers a higher return per unit of risk taken. To make our comparison relevant, we also adjusted the returns of the benchmarks used in our analysis by their volatility.

    We acknowledge that there are other measures of risk that may be of interest to market participants, such as the downside variance or Sortino ratio, which may align better with different views on risk. Those ratios are suitable for strategies with positively skewed or negatively skewed returns, such as options-based or CTA strategies (Rollinger and Hoffman 2013). Since our study universe comprised long-only, 40 Act mutual funds, and for purposes of simplicity and comprehensiveness, we chose the Sharpe ratio to represent risk-adjusted returns.

    The selection and the appropriateness of benchmarks were highly critical in evaluating risk-adjusted performance. The SPIVA U.S. Scorecard ensures that the benchmarks used in the analysis are determined based on managers’ investment styles. For example, large-cap value funds are compared against the S&P 500® Value, rather than S&P 500. As such, we are confident that the benchmarks used in our study reflect the risk profiles and the characteristics of the corresponding managers’ investments. 

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Persistence Scorecard: Latin America May 2018

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

INTRODUCTION

Following similar studies performed by S&P Dow Jones Indices on active funds in the U.S. and Australia, this report marks the introduction of the Persistence Scorecard to the Latin America region. The two aforementioned studies demonstrate that top-performing funds have little chance in repeating that success in subsequent years. Similarly, the Latin American Persistence Scorecard tracks the consistency of top-performing active mutual funds in Brazil, Chile, and Mexico.

We introduce two key statistics. First, we measure the performance persistence of top-performing active funds that remained in the top-quartile or top-half rankings over consecutive three- and five-year periods. Second, transition matrices in Exhibits 3 and 4 show the movements between quartiles and halves over two non-overlapping, three-year periods. These exhibits also track the percentage of funds that were merged or liquidated.

SUMMARY OF RESULTS

Brazil

  • Only a select number of top-performing active funds were able to maintain their top performance in subsequent years. For the 98 Brazil Equity funds in the top quartile in 2015, 5% remained in the top quartile in 2016, which then dropped to 3% in 2017. Similar figures were seen for the other categories, including zero funds maintaining top-quartile performance in the Brazil Mid-/Small-Cap and Brazil Government Bond groups. When analysis was expanded to track the top half of funds, it again showed that the majority of top-performing funds in 2015 were unable to replicate their top performance in subsequent years.
  • Expanding the time horizon to five years, Exhibit 2 shows similar results as Exhibit 1. In fact, none of the Brazil Equity funds in the top quartile in 2013 remained in the top quartile by the end of 2017. Meanwhile, just 12% of funds that were in the top half in 2013 remained in the top half by the end of the five-year period (2017).
  • Exhibit 3—which tracks the subsequent performance of funds in the second three-year period (2015-2017) that were grouped into quartiles based on the returns of the first three-year period (2012-2014)—shows a general lack of consistency. The first quartile in both the Brazil Equity and Brazil Government Bond categories showed somewhat more of a tilt toward consistency than the other categories. For the Brazil Equity category, 32% of funds in the top quartile at the end of the first three-year period remained there at the end of 2017, while 28% moved to the second quartile, 25% were in the third and fourth quartile, and 15% were liquidated or merged. Another notable observation is that for the second, third, and fourth quartiles, the amount of funds that were merged or liquidated was significantly higher in the second three-year period compared with the first quartile.

Chile

  • Of the 11 top-performing funds in 2015, just two were in the top quartile after one year, while none remained after two years. The same result of zero top-fund persistence occurred by the third year.
  • Funds that were in the top quartile for the first period and survived the second period generally performed well. Three-fourths of surviving funds stayed in the top quartile, while the remaining 25% moved to the second quartile. However, the transition matrix really highlights the outsized number of funds that became obsolete; 60% of the funds that were in the first quartile for the first three-year period ended up becoming obsolete during the second three-year period.

Mexico

  • The majority of funds in Mexico did not show consistency in being top performers, as only 2 out of the original 12 funds (16.7%) remained in the top quartile after two years. For the five-year period shown in Exhibit 2, no funds remained in the top quartile by the end of the third year.
  • The transition matrix in Exhibit 4 demonstrates that whether a fund remained in the top or bottom half in the second period was essentially a coin flip. For the funds in the top half at the end of the first three-year period, 55% remained in the top half and 45% moved to the bottom half by the end of 2017.

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SPIVA® Canada Year-End 2017

SUMMARY

  • The SPIVA Canada Scorecard reports on the performance of actively managed Canadian mutual funds versus that of their benchmarks, corrected for survivorship bias. It also shows equal- and asset-weighted peer averages.
  • The index versus active debate has been a contentious subject for decades, and there are strong opinions on both sides. The SPIVA Scorecards are the de facto scorekeepers of this debate, reporting performance over 1-, 3-, 5-, and 10-year periods.
  • All but one fund category underperformed their respective benchmarks on a relative basis over the one-year period ending Dec. 29, 2017. In other words, the majority of active managers across all categories failed to outperform their respective benchmarks, with the exception of Canada Dividend & Income Equity.
  • Domestic Equities: Despite a slow start during the first six months of the year, the headline broad market indices posted high single-digit gains in 2017, with the S&P/TSX Composite and the S&P/TSX 60 returning 9.10% and 9.78%, respectively. Almost all of the returns came in during the second half of the year.
  • Despite poor performance by the broad market indices during the first six months of the year, funds in the Canadian Equity category struggled to outperform the benchmark. The large majority of active managers investing in domestic equity underperformed the benchmark, with only 6.78% of Canadian equity funds outperforming the S&P/TSX Composite over the one-year period.
  • Yield-focused active strategies fared well in 2017. Within the Canadian Dividend & Income Equity category, 57.89% of funds outperformed their respective benchmarks over the one-year period. However, over the 10-year period, no funds were able to outpace the S&P/TSX Canadian Dividend Aristocrats®.

  • The one-year data also showed unfavorable results for actively managed funds in the Canadian Small-/Mid-Cap Equity category. Managers were not able to keep pace with the 7.04% return of the S&P/TSX Completion Index, which resulted in only 6.45% of managers outperforming the benchmark. Furthermore, on an asset-weighted basis, these funds had a one-year return of 2.40%, which represnts a 4.64% shortfall from the index.
  • Over the same period, Canadian Focused Equity managers continued to be among the worst performers. Only 4.84% managed to outperform the blended index, which allocates 50% of its weight to the S&P/TSX Composite, 25% of its weight to the S&P 500® , and 25% of its weight to the S&P EPAC LargeMidCap.
  • Over the longer term, the results were unequivocal across all domestic equity categories. The data for the five-year period showed the losing pattern repeating across all categories, as the majority of active managers underperformed their respective benchmarks. The 10-year period showed further struggles for active managers, with less than one-quarter of funds outperforming.
  • Foreign Equities: Managers investing in U.S equities saw almost no change in their relative performance over the various periods compared with the mid-year 2017 scorecard. Only 30.59% of managers in this category were able to provide excess returns over the S&P 500 (CAD) in 2017. The data also showed that an even lower percentage of managers outperformed their benchmarks in the International Equity (26.92%) and Global Equity (20.97%) categories over the same period.
  • Over the five-year period, only 10.00% of active International Equity funds and 5.63% of active Global Equity funds were able to beat their respective benchmarks. This statistic dropped to 6.06% and 2.45%, respectively, over the prior 10-year period ending Dec. 29, 2017.
  • Managers investing in the U.S. Equity category continued to struggle, with only 1.11%, 2.20%, and 1.67% being able to outpace the S&P 500 (CAD) over the 3-, 5-, and 10-year periods, respectively.

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SPIVA® South Africa Year-End 2017

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Zack Bezuidenhoudt

Director, Client Coverage Israel, Benelux, Nordics, and U.K.

S&P Dow Jones Indices

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Andrew Innes

Head of Global Research & Design

S&P Dow Jones Indices

SUMMARY

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 (SPIVA) U.S. Scorecard in 2002. The SPIVA South Africa Scorecard measures the performance of actively managed, South African equity and fixed income funds denominated in South African rands (ZAR) against their respective benchmark indices over one-, three-, and five-year investment horizons.

YEAR-END 2017 HIGHLIGHTS

In 2017, South African equity markets experienced a second-half surge and finished the year up 22.6%, as measured by the S&P South Africa Domestic Shareholder Weighted (DSW) Index. Returns for 2017 were still notably strong at 15.6% for the S&P South Africa DSW Capped Index, where no single stock weighs more than 10% at each rebalance. The rally accelerated in July when the South African Reserve Bank surprised the market by announcing a rate cut of 25 bps on the back of an improved inflation outlook and concerns for growth.

In addition, hopes of a new president toward the end of the year renewed confidence that the lethargic economic growth under Jacob Zuma could soon improve. The market began to price in the new outlook and the South African rand rose to a two-year high by the end of 2017. From the perspective of a South African investor, this appreciation offset some of the high returns offered across international markets. Despite this, the S&P Global 1200 increased 12.05% in local currency over the one-year period.

For the first time, in the SPIVA South Africa Scorecard, active fund managers were compared to the capped version of the S&P South Africa DSW Index to more accurately reflect the maximum weight that investors hold in any single stock. In 2017, 74% of active funds investing in South African equities were outperformed by this capped benchmark. When measuring their performance against the uncapped version of the same index, 96% of these same funds were beaten by the benchmark. The large increase in funds underperforming the benchmark since the mid-year SPIVA Scorecard may indicate that active fund managers were not positioned well to take advantage of the unexpected mid-year rate cut and political landscape. The median active fund recorded a return of 13.41% for the year; more than two percentage points lower than the capped comparison index.

Over the five-year period, the findings were equally clear, with 79% and 93% of actively managed South African Equity funds failing to beat the capped and uncapped benchmarks, respectively. The average asset-weighted returns for these active funds was over one percentage point lower than the capped benchmark when annualized over five years.

South-African-domiciled active funds investing in global equities, by and large, experienced similar hardship. Over two-thirds of these funds underperformed the S&P Global 1200 in 2017, with the number rising to 89% and 93% over the three- and five-year periods, respectively. When analyzing the five-year relative returns of these global equity funds, the average performance was greater on an asset-weighted basis than on an equal-weighted basis (1% below and 4% below the S&P Global 1200, respectively, on an annualized basis). This indicates that funds with greater assets under management were able to perform better than their smaller counterparts.

The SPIVA South Africa Scorecard also features the performance of fixed income funds actively managing short-term bonds and those managing diversified and aggregate bonds. The funds in the Diversified/Aggregate Bond category were measured against the S&P South Africa Sovereign Bond 1+ Year Index. In 2017, 64 of the 97 funds in existence at the start of the year recorded lower returns than the comparable benchmark. Short-term fixed income funds fared better against the South Africa Short Term Fixed Interest (STeFI) Composite, with just 14% underperforming in the year. The five-year figures were also positive for active managers in both fixed income categories, with more than threequarters outperforming the benchmarks. However, it is important to note that although the comparison indices used for the fixed income categories represent the best available benchmarks, they do not reflect the opportunities available to fixed income managers through the corporate bond markets.

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SPIVA® India Year-End 2017

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Akash Jain

Director, Global Research & Design

S&P Dow Jones Indices

SUMMARY

  • 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 our experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.
  • The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, we studied the performance of three categories of actively managed equity funds and two categories of actively managed bond funds over the 1-, 3-, 5-, and 10-year periods ending in December 2017.
  • Amid rising inflation and bond yields, foreign portfolio investors withdrew INR 21 billion from the Indian equity market and added INR 546 billion to the Indian debt market over the six-month period ending in December 2017.
  • In 2017, the S&P BSE 100, which seeks to measure the large-cap equity market performance in India, jumped 33.3%, while the mid-cap equity market, as tracked by the S&P BSE MidCap, returned 49.9%. The S&P BSE India Government Bond Index delivered a total return of 3.8% over the same period.
  • Over the one-year period ending in December 2017, 59.38% of Indian Equity Large-Cap funds underperformed their benchmark, whereas 72.09% of the Indian Equity Mid-/Small-Cap funds underperformed their benchmark.
  • Indian Large-Cap Equity Funds: Over the 1-, 3-, 5-, and 10-year periods ending in December 2017, 59.38%, 53.00%, 43.40%, and 53.54% of large-cap equity funds in India underperformed the S&P BSE 100, respectively. Over the 10-year period studied, survivorship rate and style consistency were low, at 70.08 % and 28.35%, respectively. The asset-weighted fund return was 87 bps higher than the equalweighted fund return, and the return spread between the first and the third quartile break points of the fund performance was 3.23%.

  • Indian Equity-Linked Saving Schemes (ELSS): Most actively managed funds outperformed the S&P BSE 200 across all observed time horizons. Over the 10-year period ending in December 2017, the survivorship rate was 96.55%. The asset-weighted fund return was 53 bps higher than the equal-weighted fund return, and the return spread between the first and the third quartile break points of the fund performance was 4.25%.
  • Indian Mid-/Small-Cap Equity Funds: Over the 1- and 3-year periods ending in December 2017, the majority of the actively managed mid-/small-cap equity funds in India underperformed the S&P BSE MidCap. In contrast, only 44.29% of the funds lagged the S&P BSE MidCap over the 10-year period, but the survivorship rate and style consistency were low, at 70.00% and 30.00%, respectively. For the same period, the asset-weighted fund return was 12 bps higher than the equal-weighted fund return, and the return spread between the first and the third quartile break points of the fund performance was 4.44%.
  • Indian Government Bond Funds: Over the 1-, 3-, 5-, and 10-year periods, 62.79%, 75.93%, 74.00%, and 84.75% of the actively managed funds in this peer group underperformed the S&P BSE Indian Government Bond Index, respectively. Over the 10-year period ending in December 2017, survivorship rate and style consistency were at 48.33% and 45.00%, respectively. For the same period, the asset-weighted fund return was 47 bps higher than the equal-weighted fund return, and the return spread between the first and the third quartile break points of the fund performance was 1.41%.
  • Indian Composite Bond Funds: Over the 1-, 3-, 5-, and 10-year periods ending in December 2017, 33.94%, 74.63%, 85.19%, and 90.48% of the actively managed funds in this category lagged the S&P BSE India Bond Index. Over the 10-year period, survivorship rate and style consistency were at 68.24% and 35.29%, respectively. For the same period, the asset-weighted fund return was 6 bps lower than the equal-weighted fund return, and the return spread between the first and the third quartile break points of the fund performance was 1.39%.
  • Fund Survivorship: A large percentage (about 30%) of the funds in all other categories, except ELSS, failed to survive the 10-year investment horizon. Indian Government Bond funds had the lowest survival rate, at 48.33%, while Indian ELSS funds had the highest survival rate, at 96.55%.
  • Style Consistency: Indian Equity Large-Cap and Indian Equity Mid-/Small-Cap categories were the least consistent in style, at 28.35% and 30.00%, respectively, over the 10-year period ending in December 2017. Both categories of bond funds witnessed low style consistency over the same period, while Indian ELSS funds was the only category with high style consistency (96.55%).
  • Average Fund Returns: In the one-year period ending in December 2017, both equal- and assetweighted returns of the Indian Equity Large-Cap, Indian Equity Mid-/Small-Cap, and Indian Government Bond categories were lower than their respective benchmarks. In contrast, the Indian ELSS and Indian Composite Bond categories delivered higher equal- and asset-weighted returns than their respective benchmarks over the same period. Over the 10-year period, the largest outperformance relative to its benchmark was witnessed in the Indian Equity Mid/Small-Cap fund category, where asset-weighted returns were 2.38% higher than the benchmark.

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