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SPIVA® Institutional Scorecard 2017

Persistence Scorecard: September 2018

SPIVA® Canada Mid-Year 2018

Persistence Scorecard: Latin America October 2018

SPIVA® Japan Mid-Year 2018

SPIVA® Institutional Scorecard 2017

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

EXECUTIVE SUMMARY

  • This report adds institutional accounts to the mutual funds analyzed in the U.S. SPIVA scorecards. Underperformance among institutional accounts was not meaningfully different from those reported for retail funds.
  • We also examine the impact of fees. While fees may negatively affect managers’ performance regardless of the type of investment account, our results show that the impact varies across categories.
  • For active equity institutional managers, the one-year performance figures ending December 2017 were positive. Managers in 10 out of 17 categories outperformed their benchmarks, gross-of-fees.
  • However, the majority of equity managers in 15 out of 17 categories underperformed their respective benchmarks over the 10-year horizon, gross-of-fees.

  • Large-cap value offered the best relative performance over the last 10 years. Almost 58% of active managers in this category beat the benchmark on a gross-of-fees basis, while about 53% of large-cap value institutional accounts outperformed net-of-fees.
  • Similar to findings in previous scorecards, underperformance on a net-of-fees basis was nearly always more prevalent among mutual fund managers compared with their institutional counterparts. Only multi-cap growth funds offered an exception.
  • For example, over the past 10 years in the large-cap equity space, 89.51% of mutual fund managers and 73.61% of institutional accounts lagged the S&P 500® on a net-of-fees basis. When measured on a gross-of-fees basis, 71.97% of large-cap mutual funds and 62.88% of institutional accounts underperformed.
  • The findings in the small-cap space help to dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management. Over 80% of mutual funds underperformed the S&P SmallCap 600® (net- and gross-of-fees) over the last decade, while 86.80% (72.92%) of institutional accounts underperformed on a net (gross) basis.
  • Institutional managers investing in international, international small-cap, and emerging markets fared just as well as, or better than, their domestic counterparts against their respective benchmarks on both fee schedules.
  • Results were mixed in fixed income, depending on the market segment and the type of returns used. On a gross-of-fees basis, institutional managers continued to show strength in many categories. Global aggregate, global credit, investment-grade, cash, and mortgagebacked securities (MBS) funds all outperformed their respective benchmarks.
  • The impact of fees in the municipal bond market varied significantly between institutional accounts and mutual funds. Fees overwhelmingly affected the performance of mutual fund muni managers; approximately 63% failed to beat the benchmark on a net-of-fees basis compared with 41% on a gross-of-fees basis, constituting a difference of 22%. The corresponding difference for institutional muni managers was 3%.
  • The significant performance differential in the muni mutual fund space was not surprising once we examined average fees charged by muni managers across both investment categories. The median fee for muni mutual funds was 0.75% per year, compared with 0.35% for institutional muni accounts.

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Persistence Scorecard: September 2018

SUMMARY OF RESULTS

  • When it comes to the active versus passive debate, one of the key measurements of successful active management lies in the ability of a manager or a strategy to deliver above-average returns consistently over multiple periods. Demonstrating the ability to outperform peers repeatedly is the one way to differentiate a manager’s luck from skill.
  • According to the S&P Persistence Scorecard, relatively few funds can consistently stay at the top. However, performance persistence of domestic equity funds improved compared with the results from March 2018.
  • Out of 550 domestic equity funds that were in the top quartile as of September 2016, only 7.09% managed to stay in the top quartile at the end of September 2018 (2.33% as of March 2018). Furthermore, 6.60% (0.93%) of large-cap funds, 3.95% (0%) of mid-cap funds, and 7.69% (3.85%) of small-cap funds remained in the top quartile.
  • For the three-year period that ended in September 2018, persistence figures for funds in the top half improved as well. Over three consecutive 12-month periods, 23.64% of large-cap funds, 21.71% of mid-cap funds, and 20% of small-cap funds maintained a top-half ranking.

  • An inverse relationship generally exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that only 0.91% of large cap and no mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period. This figure paints a negative picture regarding long-term persistence in mutual fund returns.
  • There was an improvement in performance persistence of top-half funds over the five-year horizon; 9.09% of large-cap funds, 11.52% of mid-cap funds, and 5.08% of small-cap funds maintained top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.25%.
  • The transition matrices are designed to track the performance of top- and bottom-quartile performers over subsequent time periods. The data show a stronger likelihood for the bestperforming funds to become the worst-performing funds than vice versa. Of 497 funds that were in the bottom quartile, 10.06% moved to the top quartile over the five-year horizon, while 21.13% of the 497 funds that were in the top quartile moved to the bottom quartile during the same period.
  • Our research also suggests that there is consistency in the death rate of bottom-quartile funds. Across all market cap categories and all periods studied, fourth-quartile funds had a much higher rate of being merged or liquidated. The five-year transition matrix shows that 31.61% of large-cap funds, 34.67% of mid-cap funds, and 24.55% of small-cap funds in the fourth quartile disappeared.
  • Compared with domestic equity funds, there was a higher level of performance persistence among the top-quartile fixed income funds over the three-year period ending September 2018. Government Long and Government Intermediate funds were the only categories in which the results showed no performance persistence.
  • Over the five-year horizon, the results show a lack of persistence among nearly all the top-quartile fixed income categories, with a few exceptions. Funds investing in long-term government and investment-grade bonds, short-term investment-grade bonds, high yield, general municipal debt, and California municipal debt were the only groups in which a noticeable level of persistence was observed. The findings are similar to those from six months prior.

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SPIVA® Canada Mid-Year 2018

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

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 assetweighted 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 globally.
  • Although trade tensions threatened to disrupt the upward trajectory of our Canadian equity benchmarks earlier this year, the S&P/TSX Composite (+10.41%) and S&P/TSX 60 (+11.45%) both rose during the 12-month period ending June 30, 2018. Strong performance in the latter half of 2017 helped.
  • Over a one-year horizon, the majority of active managers once again failed to beat their respective benchmarks; six of the seven fund categories underperformed. Canadian Dividend & Income Equity funds yielded better results than the benchmark and offered the exception.
  • While the Canadian equity benchmarks benefited from an Energy-led rally and a surge in Health Care and Information Technology stocks, actively managed domestic equity funds struggled to keep pace. 93.22% of funds in the Canadian Equity category underperformed the S&P/TSX Composite in the one-year period ending June 30, 2018.
  • Canadian Small-/Mid-Cap Equity managers also struggled to outperform as 90.91% were beaten by the S&P/TSX Completion (+7.21%). Larger funds appeared to fare relatively better than their smaller counterparts, as the category’s asset-weighted returns (+3.08%) were higher than its equal-weighted returns (+2.71%).
  • As the Bank of Canada increased interest rates, yield-focused active equity strategies continued to offer the best relative performance of any category over a one-year horizon; 67.57% of Canadian Dividend & Income Equity funds beat the S&P/TSX Canadian Dividend Aristocrats® since the end of June 2017. But 100% of the category’s funds lagged the benchmark over a 10-year horizon.

  • Canadian Focused Equity funds posted the worst relative performance over the one-year period ending June 30, 2018; 94.44% lagged the blended benchmark, which comprises the S&P/TSX Composite (50%), the S&P 500® (25%), and the S&P EPAC LargeMidCap (25%).
  • International Equity funds recorded a notable increase in underperformance over the last 12- months. Market participants may have found it difficult to navigate the impact of trade tensions and concerns over a slowdown in global economic growth. Nearly 90% of the category’s funds lagged the S&P EPAC LargeMidCap, compared with 73.08% reported in the SPIVA Canada Year-End 2017 Scorecard.
  • Underperformance also rose among funds investing in U.S. equities; only 27.59% of managers beat the S&P 500 (CAD) over a one-year horizon (versus 30.59% in our previous scorecard).
  • The longer-term results continued to show active equity funds found it difficult to beat their respective benchmarks. The data for the 10-year period shows that around 9 out of every 10 funds underperformed their respective benchmark, and a similar story is evident over a five-year horizon.
  • Fund survivorship (or the lack of) played a large role in the long-term figures; more than half of all funds in each category that were part of the investment universe 10 years ago have since been liquidated or merged.

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Persistence Scorecard: Latin America October 2018

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

INTRODUCTION

  • When it comes to the active versus passive debate, one key dimension is the ability of a manager to deliver above-average returns over multiple periods. The ability to consistently outperform is one way to differentiate a manager’s skill from pure luck.
  • In this report, we measure the performance persistence of active funds in Brazil, Chile, and Mexico that outperformed their peers over consecutive three- and five-year periods. We also analyze their performance ranking transition matrices over subsequent periods.


SUMMARY OF RESULTS

Brazil

  • Exhibit 1 shows that top-performing equity fund managers in Brazil were mostly unable to replicate that performance in subsequent years. Just 2.56% of Brazil Equity Funds that were in the top quartile in June 2016 remained there in June 2018, with similar figures for the equity size categories (5.00% for Brazil Large-Cap Funds and 6.25% for Brazil Mid- /Small-Cap Funds). Top-quartile Brazil Corporate Bond Funds managers generally did well after the one-year period, but only 30.00% remained in the top quartile after two years.
  • Exhibit 2 extends the time horizon to five years, and we are able to see that for three of the five categories (Brazil Equity Funds, Brazil Mid- /Small-Cap Funds, and Brazil Government Bond Funds), no managers remained in the top quartile by June 2018.
  • As seen in the three-year quartile transition matrix in Exhibit 3, the most common occurrence for all four quartiles of Brazil Equity Funds was for them to be merged or liquidated in the second three-year period. For Brazil Equity Funds in the first quartile, only 25.00% remained in the first quartile in the second three-year period. Top-performing managers investing in Brazil Large-Cap Funds and Brazil Mid-/Small-Cap Funds didn’t fare much better than the broad equity managers, at 29.41% and 28.57%, respectively.

Chile

  • Of the 10 top-performing Chilean funds in June 2016, five remained in the top quartile after one year, while just one fund remained in the top quartile after two years.
  • The three-year transition matrix shows that 50.00% of the top quartile from the first three-year period ended up being placed in the first or second quartile for the second period. However, 40.00% of the funds from the top quartile were merged or liquidated in the second threeyear period. For the second, third, and fourth quartiles, funds transitioned to other quartiles or were merged or liquidated with no apparent trends.

Mexico

  • One-quarter (3 of 12) of top-performing Mexico Equity Funds remained in the top quartile after one year, dropping to 2 out of 12 funds after two years (see Exhibit 1). Over five consecutive one-year periods as shown in Exhibit 2, no funds remained in the top quartile by the end of the third year (June 2017). Looking at the top half of funds, 8.70% remained there after three years, dropping to 4.35% after four years.
  • Just one fund remained in the top quartile in the second three-year period, with most funds (8 of 11) moving to quartiles 3 or 4 (see Exhibit 3). In general, funds from quartiles 2 and 3 moved up to quartile 1, while most funds from quartile 4 remained there or moved up to quartile 3.

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SPIVA® Japan Mid-Year 2018

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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 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, South Africa, Latin America, and Japan. While this report will not end the debate on active versus passive investing in Japan, we hope to make a meaningful contribution by examining market segments in which one strategy works better than the other.

  • The SPIVA Japan Scorecard reports on the performance of actively managed Japanese mutual funds against their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, we evaluated returns of more than 798 Japanese large- and mid/small-cap equity funds, along with more than 656 international equity funds investing in global, international, and emerging markets, as well as U.S. equities.

  • Domestic Equity Funds: In the 12-month period ending June 2018, the S&P/TOPIX 150 and the S&P Japan MidSmallCap gained 8.4% and 11.1%, respectively. Over the same period, 71% and 83% of large- and mid/small-cap equity funds outperformed their respective benchmarks, with average returns of 11.7% and 21.3%, respectively.

    Over the 10-year horizon, more than 50% and 60% of large- and mid/small-cap funds underperformed their benchmarks, respectively, on absolute and risk-adjusted bases. Nevertheless, the equal- and assetweighted fund returns exceeded their respective benchmarks’ returns over the same period.

    The domestic equity funds’ performance was better than the foreign equity funds’ performance in comparison with their respective benchmark indices, and domestic equity funds also had higher survivorship rate than foreign equity funds across the different measured periods.

  • Foreign Equity Funds: Over the 12-month period ending June 2018, foreign equity funds recorded worse performance compared with their respective benchmarks than domestic equity funds. The majority of foreign equity funds underperformed their respective benchmarks and posted lower equal- and asset-weighted returns than their respective benchmarks. Emerging market equity funds recorded the worst relative performance, with 99% of funds underperforming the S&P Emerging BMI.

    Over the 10-year period, the majority of funds underperformed their respective benchmarks across various foreign fund categories. More than 90% of global, international, and emerging equity funds did not survive or underperformed their respective benchmarks on absolute and risk-adjusted bases. More than 40% of foreign equity funds were merged or liquidated over the 10-year period, with international equity funds having the highest survivorship rate (72%).

    Among various foreign fund categories, the U.S. and emerging equity funds had higher return spreads (over 100 bps) between equal- and asset-weighted returns in the 5- and 10-year periods, indicating that smaller funds in these two categories tended to perform better than larger funds. Over the 10-year period, asset- and equal-weighted average annualized fund returns were below their respective benchmarks’ returns by more than 300 bps across all foreign fund categories.

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