U.S. SPIVA report takes aim at fixed income

Over one-, three- and five-year time horizons, a huge majority of actively managed funds underperformed their index, regardless of where they were in the risk curve.

Among relatively risk-free government long bond funds, 70% lagged the Barclays Long Government Index over a single year, rising to 91.30% over three years and 97.67% over the five-year period.

Slightly further out on the curve, 80.95% of funds focused on long-term investment-grade debt lagged the Barclays Long Government/Credit Index over one year, rising to 86.87% over three years and 92.38% over five.

In fact, the only sector where less than half of active managers lagged was emerging market debt. However, this was true only over the five-year history, with 43.75% trailing the Barclays Emerging Markets Index.

“The five-year data is unequivocal for fixed income funds. Across all categories except emerging market debt, more than three-fourths of active managers have failed to beat fixed income benchmarks,” wrote the report’s author, Srikant Dash, global head of research and design with Standard & Poor’s. “Similarly, five-year asset-weighted average returns are lower for active funds in all but two categories.”

And the lag in returns was not insignificant. As a group, government long bond funds averaged an annualized return of 4.63% over five years, falling well short of the index, which returned 6.94%.

The group average return for long-term investment-grade bond funds was 3.60% annualized over five years. For the index, the return was 5.65%.

When active management did excel, it was a much closer race. The five-year annualized return for active emerging markets debt funds was 8.32%, while the index returned 8.20%.

Equity funds

Looking at all domestic equity funds, regardless of style or market capitalization, SPIVA claims that 54.71% of mandates lagged the S&P Composite 1500 over the past year. That lag increased to 59.05% over a five-year time horizon.

But underperformance is not uniform across all fund styles. Interestingly, growth managers appear to have the worst track record against the benchmark indexes, with value and blended style managers faring considerably better.

According to the SPIVA, 76.69% of large cap growth funds underperformed the S&P 500 Growth Index over the past year. They did little better over the longer term, with 71.22% underperforming the index.

Among value-oriented managers, there was a marked improvement, with only 29.66% of large cap value funds lagging the S&P 500 Value Index over one year and 47.64% trailing over five years.

While the large cap segment provides the greatest gap between value and growth managers’ rates of underperformance, value managers consistently fare better across capitalization groupings.

In multi-cap mandates, 75.00% of growth funds lagged the S&P Composite 1500 Growth Index over the one-year horizon, compared to 46.25% of value managers lagging the S&P Composite 1500 Value Index. Over five years, the gap was narrower, with 63.64% of growth managers and 56.07% of value managers lagging the respective indexes.

“Our latest five-year data for equity funds can be interpreted favorably by proponents of both active and passive management,” says Dash. “Passive management believers can point out that indices have outperformed a majority of active fund managers across all major domestic and international equity categories; with real estate being the lone exception. Conversely, proponents of active fund management can point to the asset weighted averages.”

Of course, judging by returns, it made little difference whether investors placed their money in the hands of active managers or an index. The best group average (S&P MidCap 400 Growth Index) provided an annualized return of just 0.74%, while the worst-performing group (S&P BMI U.S. REIT Index) delivered an annualized loss of 3.02%.

The majority of both actively managed fund groups and passive indexes served up annualized losses of around 2%.

(08/20/09)