The Active vs Passive Scorecard

Episode Summary

Executive Summary: The episode centers on S&P’s SPIVA scorecard, which compares active funds against benchmarks and shows that while 2022’s market volatility helped active managers narrow the gap in the short term, most still lagged over longer periods. The discussion explains why dispersion, fees, and persistence matter, and why indexing remains difficult for active managers to beat consistently.

Main Topics: What SPIVA Measures (Priority: 5/5): Tim Edwards explains that SPIVA assigns funds to appropriate benchmarks and tracks how many survive and outperform on a regular basis, providing both short- and long-term views of active management. 2022’s Near Coin-Flip in Large Caps (Priority: 5/5): The hosts highlight that U.S. large-cap active managers nearly split the field in 2022, with 51% underperforming the S&P 500 year to date, making the short-term picture unusually balanced. Why Volatility and Dispersion Matter (Priority: 4/5): Edwards argues that bear markets do not automatically help active managers; instead, high dispersion across sectors and styles can make outcomes more random and widen performance differences, especially in 2022. Long-Term Underperformance and Persistence (Priority: 5/5): The conversation emphasizes the much weaker long-term record for active funds and the difficulty of identifying future winners based on past outperformance, reinforcing the persistence problem. Fees, Gross Returns, and Institutional Accounts (Priority: 4/5): The group discusses how fees affect outcomes and whether institutional resources can improve active performance. Edwards says fees matter, institutional accounts do slightly better, but most active funds still underperform. Category Differences: Growth, Value, and Fixed Income (Priority: 4/5): Different segments show different results: growth managers reversed sharply, value managers improved modestly, international small caps have been a relative bright spot, and fixed income benchmarking remains especially difficult. Asset-Weighted vs Equal-Weighted Results (Priority: 3/5): Edwards explains that SPIVA reports both equal-weighted and asset-weighted results, with asset-weighted performance generally better, reflecting scale, lower fees, and stronger execution among larger funds.

Key Arguments: SPIVA is meant to measure the full universe of active managers, not cherry-pick the best funds after the fact. Short-term results can look close to 50/50, but longer horizons reveal persistent underperformance by most active managers. 2022’s volatility and sector dispersion increased randomness, which can make active results look better temporarily without proving skill. Bear markets do not reliably improve active management outcomes; they often just increase noise. Past outperformance is a weak predictor of future outperformance, as shown in SPIVA’s persistence analysis. Fees matter, but even gross of fees and with institutional resources, most active funds still fail to beat benchmarks. Fixed income is harder to benchmark cleanly than equities because duration, credit risk, and style drift can obscure comparisons. Growth managers appeared to concentrate bets more aggressively, which led to weaker results when growth sold off. Active management still has a role in price discovery and capital allocation, even if it is hard to beat passive indices consistently.

Data Points: U.S. large-cap active funds underperforming in 2022: 51% - Year to date through mid-2022 in the latest SPIVA U.S. scorecard. Active funds underperforming over 3 years: 86% - Long-term SPIVA U.S. equity results. Active funds underperforming over 10 years: 90% - Long-term SPIVA U.S. equity results. Active funds underperforming over 20 years: 95% - Since SPIVA reports began. Last time dispersion was this high: 2009 - Edwards notes 2022 dispersion matched the last major spike after the financial crisis. Value managers outperforming the S&P 500: 56% - The hosts cite the value category’s relative improvement during the value comeback. Large-cap growth managers underperforming over 3 years: 93% - Used to illustrate the reversal in growth strategy performance. Intermediate U.S. government fixed income underperformance: Particularly tough year - Edwards says duration-related losses hurt active bond managers in that segment. General investment-grade bond underperformance rate: 17% - A relatively strong short-term fixed income result for active managers. SPIVA report frequency: Semi-annual - Edwards says the report is published every six months.

Pivotal Quotes: "The concept is really, really simple. The idea is to take a database of actively managed funds, assign each fund correctly to a representative benchmark." — Tim Edwards: Explaining the purpose and methodology of SPIVA. "What the data says is that it is difficult to identify a fund that will win based on those that have outperformed in the past." — Tim Edwards: On the persistence problem and why historical winners are hard to repeat. "What really is zero-sum is outperformance, is being smarter than everyone else or than the majority." — Eric Balchunas: Summarizing the competitive nature of active management versus passive investing.

Implications: Listeners should treat short-term active outperformance with caution: the long-term odds remain poor, and past winners rarely stay winners. For the industry, the data reinforces passive’s appeal while preserving a role for specialized active strategies in select niches.