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SPIVA® South Africa Year-End 2017

SPIVA® India Year-End 2017

SPIVA® Japan Year-End 2017

SPIVA® Europe Year-End 2017

SPIVA® U.S. Year-End 2017

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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SPIVA® Japan Year-End 2017

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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 780 Japanese large- and mid/small-cap equity funds, along with more than 624 international equity funds investing in global, international, and emerging markets, as well as U.S. equities.

  • Domestic Equity Funds: In 2017, the S&P/TOPIX 150 and the S&P Japan MidSmallCap gained 20.1% and and 25.6%, respectively. Over the same period, the majority of large- and mid/small-cap equity funds outperformed their respective benchmarks, with average returns of 26.0% and 42.6%, respectively, which is more favorable than the observations over longer periods.

    Over the 10-year horizon, 44.0% and 36.5% of large- and mid/small-cap funds outperformed their benchmarks, respectively, on an absolute basis. The large-cap funds were merged or liquidated at a rate of 31.8%, while the mid/small-cap funds disappeared at a higher rate of 39.0% in the 10-year period.

    The mid/small-cap equity funds outperformed the benchmark by 2.3% per year in their equal-weighted return for the 10-year period, but the premium disappeared in their asset-weighted return. This implies alpha from active selection in mid/small-cap stocks was restricted for the larger funds due to the low investment capacity of small-cap stocks.

  • Foreign Equity Funds: In contrast to the outstanding performance of domestic equity funds, foreign equity funds in Japan delivered disappointing performance compared to their benchmarks in 2017. Despite various foreign equity indices recording double-digit returns for the year, more than 70% of U.S. and emerging equity funds and more than 60% of global and international equity funds underperformed their respective benchmarks.

    Over the 10-year period, the vast majority of funds underperformed their respective benchmarks across various foreign fund categories. Less than 5% of the international and emerging equity funds managed to survive and outperform their respective benchmarks on both an absolute and risk-adjusted basis. Furthermore, 38.2% of funds across all foreign equity fund categories were merged or liquidated over the 10-year horizon, with U.S. equity funds disappearing at the fastest rate (44.0%).

    Average relative performance of foreign equity funds were mostly in downward trends compared to their benchmarks over the past 10 years. U.S. equity funds recorded the worst relative return, with annualized underperformance of 4.3% and 5.8% on equal- and asset-weighted bases, respectively. Among the U.S. and emerging equity funds, average returns were higher when equally weighted than when asset weighted, indicating smaller funds tended to perform better than the larger funds in these two categories.

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SPIVA® Europe Year-End 2017

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Andrew Innes

Head of Global Research & Design

S&P Dow Jones Indices

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. 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 S&P DJI benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.

YEAR-END 2017 HIGHLIGHTS

  • European equity markets achieved strong, above-average gains in 2017. The S&P Europe 350 ended the year 10.75% higher, as historically low levels of volatility in the markets indicated investors’ confidence in the strength of the continent’s economy and stability of its pro-EU leadership.
  • Continued global expansion throughout the year supported strong bull rallies across international markets. Despite robust global growth, the weakening of the U.S. dollar throughout the year reduced returns for European investors holding global and U.S. equities. The S&P Global 1200 and the S&P 500® finished the year up 8.57% and 7.01%, respectively, in euro terms. Meanwhile, the broad emerging equity benchmark recorded an impressive one-year return of 21.12% in euro terms, as measured by the S&P/IFCI.
  • The majority of active fund categories in Europe underperformed over the past 10 years. Nine out of 23 active fund categories across the European-domiciled equity funds analyzed were able to provide average asset-weighted returns above their corresponding benchmarks over a 10-year period. Furthermore, in those nine outperforming categories, less than one-third of the funds beat the benchmark. This indicates that a minority of funds were responsible for each group’s success.
  • U.S. and Emerging Market Equity funds domiciled in Europe remained among the region’s worst-performing active fund categories. Euro- and pound sterling-denominated funds investing solely in U.S. equities provided average returns that were below their local currency S&P 500 benchmark for all periods analyzed. Less than one-third of these funds outperformed in 2017 and less than one-tenth outperformed since 2008.
  • Likewise, European funds managing global emerging equities failed to deliver average returns above the benchmark over any period analyzed. Interestingly, this finding is in stark contrast to the widely held belief that inefficient markets provide the best opportunities for stock pickers to outperform.
  • One-year performance of active pan-European equity funds (euro-denominated) relative to the S&P Europe 350 was fairly evenly split. In 2017, 53% of funds in the category outperformed the benchmark. Over the 10-year period, 15% of funds in the same category beat the S&P Europe 350. Of the funds that were in existence in the category at the start of 2008, 45% survived to the end of 2017.
    The average asset-weighted performance for the fund category was 11.97% for the year, compared with a return of 10.75% for the benchmark. Over the 10–year period, the equivalent average return figure was lower than that of the benchmark, at 3.37% and 4.08%, respectively.
  • In contrast to pan-European equities, only 26% of actively managed funds investing solely in Eurozone equities beat the S&P Eurozone BMI in 2017, dropping to 12% over the 10–year period. The average asset-weighted performance for the group was consistently lower than the S&P Eurozone BMI by one percentage point on an annualized basis over all periods analyzed.
  • Single-country fund categories across Europe had mixed results in 2017. A majority of funds in Italy, Swtizerland, Germany, the UK, and Sweden outperformed over the one-year period. The same categories also provided average asset-weighted returns above their corresponding benchmarks. However, the majority of funds investing in equities in Denmark, Poland, The Netherlands, Spain, or France were beaten by their corresponding benchmarks in 2017.
    Only Italy maintained a majority of active funds outperforming over the one-, three-, and five- year periods. In no fund category did a majority of funds outperform over the 10-year period.
  • UK Small-Cap Equity funds performed markedly better than their UK Large-/Mid-Cap counterparts in 2017. Of actively managed UK Small-Cap Equity funds, 80% outperformed their benchmark for the year, compared with 46% for the UK Large-/Mid-Cap Equity fund category. Average asset-weighted returns for these UK small-cap funds exceeded the S&P United Kingdom Small-Cap by nine percentage points for the year.
    The recent success of these small-cap funds over large-cap funds in the UK was in contrast to the long-term picture; the reverse was true over the 10-year period. In both categories, however, 10- year outperformance was achieved by less than one-quarter of the funds.

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SPIVA® U.S. Year-End 2017

SUMMARY

  • The U.S. equity market ended 2017 on a strong positive note, with the S&P 500® posting 21.83% over the 12-month period as of Dec. 31, 2017. The S&P MidCap 400® and S&P SmallCap 600® followed, reporting gains of 16.24% and 13.23%, respectively.
  • During the one-year period, the percentage of managers outperforming their respective benchmarks noticeably increased in categories like Mid-Cap Growth and Small-Cap Growth Funds, compared to results from six months prior. Over the one-year period, 63.08% of large-cap managers, 44.41% of mid-cap managers, and 47.70% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
  • While results over the short term were favorable, the majority of active equity funds underperformed over the longer-term investment horizons. Over the five-year period, 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks.
  • Similarly, over the 15-year investment horizon, 92.33% of large-cap managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform on a relative basis.
  • Over the 12-month period ending Dec. 31, 2017, growth managers across all three market cap ranges fared better than their core and value counterparts. The results highlight the cyclicality of style box investing, as core managers outperformed 12 months prior with the exception of small caps, while value managers outperformed core and growth 18 months prior.

  • Across nine U.S. style categories, large-cap value managers was the best performing category over the10-year and 15-year horizons, with 29.56% and 14.29% of managers outperforming the benchmark, the S&P 500 Value.
  • The headline international equity and emerging market equity indices began a strong rally in November 2016 that continued through 2017. Over the one-year period ending Dec. 31, 2017, the S&P/IFCI Composite posted 37.89%; the S&P Developed Ex-U.S. Small Cap, S&P International 700, and S&P Global 1200 reported 32.37%, 26.64%, and 23.84%, respectively, over the same period.
  • During the one-year period, with the exception of actively managed international small-cap equity funds, the majority of managers investing in global, international, and emerging market funds underperformed their respective benchmarks.
  • Over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks. Furthermore, the longer the time horizon, in general, the more funds underperformed.
  • The U.S. Federal Reserve increased rates three times during 2017. However, the 10-Year U.S. Treasury yield has not moved significantly off of its year-end 2016 levels, resulting in a flatter yield curve. During the one-year period ending Dec. 31, 2017, the majority of active fixed income managers investing in long-term government and corporate credit bonds underperformed their benchmarks, marking a shift from six months prior when they vastly outperformed.
  • In contrast, funds investing in short- and intermediate-term government and credit bonds outperformed their benchmarks.
  • Across all time periods studied, high-yield managers struggled to outperform their benchmark. During the one-year period, over 80.95% of actively managed high-yield bonds failed to deliver higher returns than the benchmark’s 7.50% return.
  • The majority of municipal funds outperformed over the 12-month period, despite having mixed results over the three- and five-year investment horizons. However, over the 10- and 15-year periods, most muni funds underperformed their benchmarks. While these funds underperformed over the long term, it should be noted that municipal categories have some of the best survivorship statistics.
  • Funds disappear at a meaningful rate. Over the 15-year period, 58% of domestic equity funds, 55% of international equity funds, and an average of 48% of all fixed income funds were merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis.

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