The latest report card for active versus passive management is out and the results are not very encouraging. The S&P Index Versus Active (SPIVA) report found that 60% of active Canadian equity funds beat the S&P Composite Index for the third quarter of 2008. While the numbers are a huge improvement over the 8.5% of funds that beat the index over the previous three years or the 7.1% of mutual funds that did over five, the results are a reminder of how the odds are stacked against fund investors. Despite the conventional wisdom that active mutual funds perform better in bear markets, the record of the third quarter of 2008 shows that active outperformance was only slightly better than a coin toss.
It turns out that the numbers reported in the latest SPIVA report isn’t all that unusual. A recent study by Vanguard found that there is little evidence to back up the claim that active funds are better performers in bear markets despite their potential to do so through tactical shifts in asset allocation:
Despite the bias toward survivors, we observe that a majority of active managers outperformed the market in just 3 of 6 U.S. bear markets and in 2 of 5 European bear markets. To be sure, in each bear market, funds existed that successfully outperformed the broad market. However, these results clearly indicate a lack of consistency with respect to the success of active funds in general.