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SPIVA U.S. Mid-Year 2022

SPIVA Institutional Scorecard Year-End 2021

SPIVA Australia Mid-Year 2022

Australian Persistence Scorecard: Year-End 2021

Canada Persistence Scorecard: Year-End 2021

SPIVA U.S. Mid-Year 2022

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Tim Edwards

Managing Director and Global Head of Index Investment Strategy

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Anu R. Ganti

Senior Director, Index Investment Strategy

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Craig Lazzara

Managing Director, Core Product Management

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Joseph Nelesen, Ph.D.

Senior Director, Index Investment Strategy

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Davide Di Gioia

Director, Index Investment Strategy

SUMMARY

The S&P 500® made an all-time high on the first trading day of 2022, but as monetary taps tightened, U.S. equity markets turned bearish. The Federal Reserve had telegraphed its intention to raise rates before the year turned, but when the conflict in Ukraine triggered a spike in energy and raw commodity prices, producing a 40-year high in U.S. inflation, the central bank accelerated its plans. A series of rate hikes helped send the S&P 500 into a 20% drawdown by mid-June, and fixed income offered few safe harbors as yields rose across the curve and longer-dated Treasury bonds made their worst start to a year this century.

Declining markets make active management skills all the more valuable, and our report shows that a significant minority of active managers were able to outperform in several categories. After suffering an 85% underperformance rate in 2021, just 51% of large-cap domestic equity funds lagged the S&P 500 in the first six months of 2022, putting actively managed large-cap U.S. equity funds on track for their best (i.e., lowest) underperformance rate since 2009.

SPIVA U.S. Mid-Year 2022 Exhibit 1

Similarly, 54% of mid-cap and 63% of small-cap funds underperformed the S&P MidCap 400 and the S&P SmallCap 600, respectively, in H1. There was a wide range of performance across various domestic equity categories, topped by a creditable 33% of Mid-Cap Core funds underperforming in H1. At the other end of the spectrum, a turn to outperformance from value accompanied a disappointing period for growth managers, 79%, 84% and 89% of whom underperformed in the large-, small- and mid-cap Growth categories, respectively, in H1.

In international equities, a majority of actively managed funds underperformed in every category during H1 but, in relative terms, managers in the International Small-Cap category continued to outshine their peers, with just 57% underperforming compared to H1 underperformance rates of 68%, 71% and 74%, in the Global, International, and Emerging Market categories, respectively.

The February 2022 completion of the merger between IHS Markit and S&P Global brought a new range of fixed income indices to the S&P DJI stable, and this edition of our SPIVA U.S. Scorecard welcomes a new range of fixed income comparison indices, as well as several new fixed income categories. Highlights from the H1 fixed income statistics included 93% of Core Plus Bond funds and 59% of actively managed high-yield U.S. funds outperforming the iBoxx $ Liquid Investment Grade Index and iBoxx $ Liquid High Yield Index, respectively, but benchmark-beating returns were harder to find in the Loan Participation, General Municipal Debt and Intermediate U.S. Government categories—with underperformance rates of 83%, 86% and 89%, respectively.

Echoing a frequent theme of SPIVA Scorecards over the past 20 years, underperformance rates generally rose with the length of the period in which they were measured. Exhibit 2 illustrates the marked differences in the distributions of short- and longer-term underperformance rates across all the reported fund categories in our scorecard. While there was a broad mix of underperformance rates in H1, over a 15-year horizon, more than 70% of actively managed funds failed to outperform their comparison index in 38 out of 39 categories.

SPIVA U.S. Mid-Year 2022 Graph 2

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SPIVA Institutional Scorecard Year-End 2021

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Tim Edwards

Managing Director and Global Head of Index Investment Strategy

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Anu R. Ganti

Senior Director, Index Investment Strategy

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Craig Lazzara

Managing Director, Core Product Management

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Davide Di Gioia

Director, Index Investment Strategy

SUMMARY

In this report, we add institutional accounts to the mutual funds analyzed in the S&P Indices Versus Active (SPIVA) U.S. Scorecard. We aim to provide the institutional community with the ability to judge managers' true skill without the possible distortions that fees may create on performance comparisons. We also examine the impact of fees on both account types and illustrate the similarities and differences between the performances of open-end funds and segregated institutional accounts across categories.

Over the long term and gross-of-fees, underperformance among institutional domestic equity accounts was not meaningfully different from that of mutual funds. For example, 78% of both large-cap institutional accounts and large-cap mutual fund managers underperformed the S&P 500® over the 10-year period ending Dec. 31, 2021. After deducting fees (see section "About the SPIVA Institutional Scorecard"), there was a similarly small distinction between their underperformance rates, which both increased to 83% (see Exhibit 1).

Exhibit 1

Overall, 2021 continued to witness better performance from institutional accounts than from mutual funds, with lower 10-year underperformance rates (gross-of-fees) in 17 of the 21 reported equity segments. Nonetheless, in 16 out of 17 domestic equity fund categories, and in 3 out of 4 international equity categories, a majority of institutional accounts underperformed over a 10-year period. Underperformance rates ranged from 81% of large-cap core accounts to 46% of international small-cap equity accounts.

Volatility remained muted in 2021 in comparison to the pandemic-induced turmoil of 2020, but there were still opportunities for active managers to add value through security, sector and style selection during the year, as well as a moderate tailwind from equal weighting (rather than capitalization weighting) in large-cap U.S. equities. These two facts suggest conditions were not unfavorable for actively managed equity portfolios in 2021.

Several other details illustrate the opportunity set: most infamously, unprecedented price disconnections arose in widely-publicized "meme stocks," the extremes of which accompanied an all-time high in stock-level dispersion within the S&P SmallCap 600® in January 2021. But the opportunities for outperformance were not limited to smaller stocks, or just U.S. equities, with above-average dispersion observed across U.S. and global equity benchmarks during 2021. There were cross-geographic opportunities, too, as the S&P 500 completed its third consecutive year of double-digit gains, rising 29%, while the S&P/IFCI Composite gained less than 1% and the large-cap developed S&P International 700 rose 10% (see Reports 3 and 9). These returns created a tailwind for internationally benchmarked funds tempted by domestic allocations but a more challenging environment for domestic funds shopping abroad. Meanwhile, the S&P 500 Equal Weight Index outperformed the S&P 500 by 1% over the year, indicating that weighting by market capitalization may have been—all else equal—slightly disadvantageous.

Of course, since we cannot all be above average, the potential for above-average performance requires a possibility for below-average performance. Offering confirmation that 2021's markets were bristling with opportunities for active managers to fall behind, in 14 out of 17 domestic U.S. equity categories, a majority of institutional accounts underperformed, gross-of-fees, in 2021 (see Report 1). Chief among those categories was the large-cap U.S. growth category, within which 94% of actively managed institutional accounts underperformed the S&P 500 Growth, gross-of-fees. Conversely, the large-cap U.S. value category was a notable exception to the rule, where a creditable 26% underperformance rate was observed. The combination of the two statistics suggests that, in both categories, active managers may have been systematically allocating across the growth/value divide.

As might be expected given the international benchmarks' returns, much lower underperformance rates were observed in the international equity categories, including underperformance rates of 25% and 28%, respectively, in the international and international small-cap categories (see Report 6).

Conversely, in 12 of 17 reported fixed income categories, a majority of actively managed institutional accounts outperformed, gross-of-fees, in 2021 (see Report 11). While the outperformance rate generally decreased in every category over longer time horizons, a majority also outperformed in 9 out of the 17 categories over a 10-year horizon. There were nonetheless some pockets in which outperformance was harder to find: intriguingly, given the surge in domestic inflation that has rocked the U.S. fixed income markets in the first half of 2022, more than two-thirds of institutional accounts in the U.S. inflation-linked category underperformed in 2021, with a similar proportion underperforming over the past decade.

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SPIVA Australia Mid-Year 2022

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Benedek Vörös

Director, Index Investment Strategy

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Tim Edwards

Managing Director and Global Head of Index Investment Strategy

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Davide Di Gioia

Director, Index Investment Strategy

The SPIVA Australia Scorecard measures the performance of Australian actively managed funds against their respective benchmarks over various time horizons, covering large-, mid- and small-cap equity funds, real estate funds and bond funds, providing statistics on outperformance rates, survivorship rates and fund performance dispersion.

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

Mid-Year 2022 Highlights

In the first half of 2022, outperformance was close to a coin flip for Australian Equity General funds, with 50% underperforming the S&P/ASX 200.  Over the same period, 40% of Australian Equity A-REIT funds underperformed their respective benchmarks, while a majority of funds lagged in the fixed income and small-cap equity categories.  An increasing majority of active funds underperformed in every reported category over longer-term horizons (see Exhibit 1 and Report 1).

  • Australian Equity General Funds: The S&P/ASX 200 dropped 9.9% in the first six months of the year, while Australian Equity General funds shed 10.0% and 11.0% on equal and asset-weighted bases, respectively. Of funds in this category, 49.8% underperformed the benchmark over the first half of the year, with underperformance rates rising to 73.6%, 77.2% and 82.9% over the 5-, 10- and 15-year horizons, respectively.
  • Australian Equity Mid- and Small-Cap Funds: The S&P/ASX Mid-Small gave up 20.3% in the six months ending June 30, 2022, and just 31.8% of Australian Equity Mid- and Small-Cap funds beat the index, while more than 81% underperformed on a risk-adjusted basis. Funds in this category lost 24.2% and 26.0% on equal- and asset-weighted bases, respectively, for the same period.  The longer-term record within the small- and mid-cap category was relatively stronger, with just 51.0% underperforming over 15 years.
  • International Equity General Funds: International equity funds returned -17.2% and
    -16.6% on equal and asset-weighted bases in the six-month period ending on June 30, 2022, with 56.9% of funds failing to keep up with the S&P Developed Ex-Australia LargeMidCap. Over the 5- and 10-year periods, more than 85% and 95% of funds underperformed, respectively.

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Australian Persistence Scorecard: Year-End 2021

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Tim Wang

Senior Analyst, Global Research & Design

EXECUTIVE SUMMARY

  • While comparing active funds against their respective benchmark indices is a typical practice to evaluate their performance, persistence is an additional test that can reveal fund managers’ skills in different market environments.
  • In this report, we measure the performance persistence of active funds that outperformed their peers and benchmarks over consecutive three- and five-year periods, and we analyze their transition matrices over subsequent periods.
  • Overall results suggested only a minority of Australian high-performing funds persisted in outperforming their respective benchmarks or consistently stayed in their respective top quartiles for three or five consecutive years.

  • Over the consecutive three-year period, 13.6% of funds consistently maintained top-quartile rankings and 29.4% of funds beat their benchmark consistently.
  • Over the consecutive five-year period, only 3.0% of funds consistently maintained top-quartile rankings and 4.4% of funds beat their benchmark consistently.
  • Top-quartile and outperforming Australian funds did not show strong persistence over two non-overlapping three- and five-year periods, though they tended to have lower liquidation rates.
  • Only 32% of funds maintained top-quartile rankings over two successive three-year periods and fewer (28%) did so for two successive five-year periods.

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Canada Persistence Scorecard: Year-End 2021

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Berlinda Liu

Director, Multi-Asset Indices

Our widely followed SPIVA® Canada Scorecard has consistently shown that most Canadian active managers underperform their benchmarks most of the time. But, when an active manager outperforms, how do we know whether the result is a product of genuine skill or merely of good luck? One key is that genuine skill is likely to persist, while luck is random and can soon dissipate.

The Canada Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers' success. Historically, persistence reports have shown that, regardless of asset class or style focus, active management outperformance is typically short lived, with few funds consistently outranking their peers. While our latest report shows some improvement in persistence, it remains the case that historical good performance is not predictive of future good performance.

For example, Exhibit 1 shows that of the 277 funds that ranked in the top half of their respective style category during 2012-2016, just 48.4% remained in the top half for 2017-2021. Meanwhile, the most likely outcome for bottom-half funds was to shut their doors for good.

Canada Persistence Scorecard Year-End 2021 - Exhibit 1

There was greater evidence of persistence during more recent years and when viewed at shorter intervals. In six of the seven categories tracked, more than 25% of the funds in the top half in 2019 maintained that status in 2020 and 2021, lending some credence to the idea of fund persistence. Leading the way were Global Equity and International Equity funds, with more than 35% of funds managing that feat (see Report 1).

Similarly, there were a total of 173 funds that ranked in the top quartile for their style category in 2017. Of those 173, 5 funds (2.9%) stayed in the top quartile annually through 2021. Viewed probabilistically, this is better than the (25%)4 = 0.39% that might be expected if fund performance were purely random. As such, while the Persistence Scorecard does not prove that fund performance is completely random, from a practical or decision-making perspective, it tends to reinforce the notion that choosing between active funds on the basis of previous outperformance could be a misguided strategy. Although analysis of funds in Canada suffers from small sample sizes, this may be reinforced by the observation that these five funds were all Global Equity or U.S. Equity funds, with the other five categories displaying no top-quartile persistence (see Report 2).

Transition matrices tell a similar story. Using three-year windows, four of the seven categories show greater than 50% of top-half funds from the 2016-2018 period remaining in the top half for 2019-2021. Switching to the five-year window, only in two categories did more than 50% of funds qualify for the top half for both the 2012-2016 and 2017-2021 periods (see Reports 4 and 6).

Unsurprisingly, the one pattern that did hold across categories was the tendency of the poorest-performing funds to close. Third- and fourth-quartile funds were generally the most likely to merge or liquidate over the subsequent three- and five-year windows, led by the 55% of Canadian Focused Equity bottom-quartile funds in the 2012-2016 period that disappeared by 2021 (see Reports 3 and 5).

Style changes did not appear to be correlated with fund performance. Top, middle and bottom performers within a category generally had similar chances of style drift over the three- and five-year periods. Over a five-year period, Canadian Dividend & Income Equity funds had the highest percentage of style change (7.3%), with Canadian Small-/Mid-Cap Equity funds leading the way over the three-year period (8.1%, see Reports 3 and 5).

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