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Risk-Adjusted SPIVA® Scorecard: Year-End 2020

SPIVA® Europe Year-End 2020

SPIVA® Canada Year-End 2020

SPIVA® U.S. Year-End 2020

SPIVA Australia Year-End 2020

Risk-Adjusted SPIVA® Scorecard: Year-End 2020

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

Since 2002, SPIVA scorecards have shown that active funds typically underperform their benchmarks on an absolute return basis. However, active funds could compare favorably to passive investments after adjusting for volatility, if lower active returns were a consequence of risk reduction.

The Risk-Adjusted SPIVA Scorecard considers this possibility by comparing the risk-adjusted returns of actively managed funds against their benchmarks on a net-of-fees and gross-of-fees basis. We use the standard deviation of monthly returns as a measure of risk and evaluate performance by comparing return/volatility ratios.

After a relatively quiet decade following the Global Financial Crisis, volatility returned with a vengeance in 2020. Backed by fiscal and monetary stimulus, the S&P 500® gained 18.4% on the year, though this bout of volatility and positive returns did little to help the case for active management. After adjusting for volatility, the majority of actively managed domestic funds across market cap segments underperformed their benchmarks on a net-of-fees basis over mid-and long-term investment horizons.

Exhibit 1

Mid-cap and small-cap growth funds were interesting exceptions in a sea of underperformance. Over a five-year period, nearly two-thirds of funds in both categories outperformed, whereas only one-quarter of large-cap growth funds outperformed. Active managers focusing on smaller-capitalization companies may have skewed their portfolios toward the market-leading larger companies recently, but this peculiarity faded away over the long term. Over the 10- and 20-year periods, mid-cap and small-cap growth funds reverted to form and matched their large-cap compatriots, with fewer than 10% managing to outperform in any of the three categories.

Naturally, the risk-adjusted performance of active funds improves on a gross-of-fees basis, but even then, outperformance is scarce. Viewed over a five-year period, a majority of funds in only 6 of the 18 domestic equity categories tracked were able to outperform their benchmarks. Over a 20-year window, only two domestic equity categories showed the majority of funds outperforming their benchmarks.

As in the U.S., the majority of international equity funds across all categories generated lower risk-adjusted returns than their benchmarks when using net-of-fees returns over the previous five-year period. International equity funds also matched their domestic peers over the longer term, as fewer than 15% surpassed their benchmarks over a 20-year horizon. On a gross-of-fees basis, the only bright spot was international small-cap funds in the 10-year window, of which 64% cleared their hurdle rate.

When using net-of-fees risk-adjusted returns, the majority of actively managed fixed income funds in most categories underperformed across all three investment horizons. The only exceptions were government long funds and investment-grade long funds over the 5- and 10-year periods.

The importance (and performance-sapping nature) of fees is well highlighted when analyzing fixed income fund performance in a low-yield world. A respectable 9 of the 14 fixed income categories showed a majority of funds outperforming their benchmarks on a gross-of-fees basis over the past 15 years.

On a net-of-fees basis, asset-weighted return/volatility ratios for active portfolios were higher than the corresponding equal-weighted ratios, indicating that larger firms have taken on higher-compensated risk than smaller ones. On an asset-weighted basis, large-cap value, small-cap value, mid-cap core, multi-cap value, and REIT funds were the only domestic equity categories to provide better return/volatility ratios than the benchmark over 20 years. On an equal-weighted measure, this fell to just three categories: large-cap value, small-cap value, and real estate funds.

Most fund categories produced higher return/volatility ratios than their benchmarks, gross of fees, on an equal-weighted basis. However, their outperformance diminished once fees or fund size were accounted for, especially in domestic and international equity funds. In general, equal-weighted return/volatility ratios improved more than the corresponding asset-weighted ratios when fees were ignored, indicating that fees play a more prominent role in smaller funds' performance.

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SPIVA® Europe Year-End 2020

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Andrew Innes

Head of EMEA, Global Research & Design

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Andrew Cairns

Associate Director, Global Research & Design

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Alberto Allegrucci

Senior Research Analyst, Global Research & Design

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 2020 HIGHLIGHTS

The year 2020 proved to be a tumultuous one for European investors, with COVID-19 and subsequent national lockdowns grinding the economies of Europe to a halt.  The uncertainty surrounding the pandemic provided an ideal opportunity for active fund managers to prove their worth in what was an extremely volatile period.

  • Of active euro-denominated Europe Equity funds, 37% underperformed the S&P Europe 350® in 2020. This figure rose to 75% over 5 years and 86% over 10 years.

As the first wave of COVID-19 peaked in March 2020, the S&P Europe 350 benchmark saw its biggest single-month loss in more than 10 years.

  • Active fund investors were not immune to the troubles; on an asset-weighted basis Europe Equity funds also suffered their largest single-month loss in more than 10 years. This tail-risk event was similarly seen in 13 of the remaining 22 fund categories and 19 of the 22 benchmarks.

The sharp drawdown was followed by a modest recovery, aided by monetary and fiscal stimulus packages swiftly assembled by central banks and governments.  As the first wave of COVID-19 began to settle, markets calmed and grew at a steady pace over the summer months.  News of a vaccine broke in early November and immediately sent markets soaring.

  • The renewed optimism saw the majority of fund categories and benchmarks post their largest single-month gains in the past 10 years. Out of 23 categories, 14 exhibited their largest single-month return in over 10 years when measured on an asset-weighted basis.  The same was true for 17 out of 23 benchmarks.

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SPIVA® Canada Year-End 2020

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

Canada joined markets around the world facing extraordinary volatility in 2020, strongly selling off February highs before rebounding, as the scale and management of the pandemic grew clearer. The S&P/TSX Composite posted a respectable 5.6% gain for the year, and the smaller-cap names of the S&P/TSX Completion finished slightly ahead with a 6.0% return. However, both of these returns were well below the 16.3% gained by the S&P 500® (CAD) and other global benchmarks.

Although this volatile period offered ample opportunity for stock-pickers to shine, 88% of Canadian Equity funds underperformed their benchmark in 2020, in line with the 84% that did so over the past 10 years. This shortfall was widespread, as a majority of funds underperformed in five of the seven categories in 2020. Over the past decade, a majority of managers in every fund category lagged their benchmarks (see Report 1).

Exhibit 1

Canadian Equity funds were particularly notable for their level of underperformance. On an equal-weighted basis, Canadian Equity funds returned a bleak 4.8% below the S&P/TSX Composite over the past year, the worst relative performance of any fund category (see Report 3).

Canadian Small-/Mid-Cap Equity funds had a banner year, as just 22% failed to beat the S&P/TSX Completion. These funds were particularly deserving of praise for gaining an average of 14.3% on an equal-weighted basis—8.3% clear of the benchmark. Results were somewhat less triumphant over longer horizons though, as 71% and 91% of funds fell short over the three- and five-year periods, respectively (see Reports 1 and 3).

Canadian Dividend & Income Equity funds took second place among fund categories, with just 44% lagging the S&P/TSX Canadian Dividend Aristocrats® Index in 2020. This was also the only category with negative returns for 2020; the index lost 2.3% on the year, and on an equal-weighted basis, the funds lost 1.2%. This picture reverted to form over the 10-year horizon, as the index led (7.1% annualized return) and the funds followed (5.3% annualized return, with 91% of funds performing worse than the index; see Reports 1 and 3).

Among Canadian Focused Equity funds, 71% lagged the blended benchmark, which comprises the S&P/TSX Composite (50%), the S&P 500 (CAD) (25%), and the S&P EPAC LargeMidCap (CAD) (25%). Canadian Focused Equity funds were also notable for having the worst chances of beating the index over the 10-year period, with just 4 of 128 funds (3.1%) surpassing the blended target. Asset allocators punished these funds heavily, as only 37% of funds survived the decade, the worst survivorship of any category (see Reports 1 and 2).

Funds looking outside of Canada provided some respite from poorer domestic returns, although active management still broadly failed to add value. U.S. Equity funds posted the highest returns over the past year, with a 13.6% gain on an equal-weighted basis and 17.4% on an asset-weighted basis. However, 69% of funds failed to clear the returns of the S&P 500 (CAD) over the past year. Similarly, U.S. equities offered the best returns over the past decade, with the S&P 500 (CAD) gaining 16.8% per year, but active funds were unable to keep up: 95% fell short, by an average of 4.1% per year on an equal-weighted basis (see Reports 1, 3, and 4).

International Equity funds did slightly better on a relative basis over the past year, with 60% underperforming. Nonetheless, the average equal-weighted performance was 7.0%, well shy of the 9.0% gain of the S&P EPAC LargeMidCap (CAD). Global Equity funds put up a feeble defense of active management, with 78% underperforming the 14.9% gain of the S&P Developed LargeMidCap, with an average equal-weighted performance of just 10.8% (see Reports 1 and 3).

Larger funds in Canada tended to outperform their smaller counterparts, as 22 of the 28 results showed higher asset-weighted returns across the seven fund categories and four time horizons studied (see Reports 3 and 4).

The SPIVA Scorecards' accounting for survivorship bias continues to provide a valuable caution for asset allocators, as 54% of all funds in the eligible universe 10 years ago have since been liquidated or merged (see Report 2).

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SPIVA® U.S. Year-End 2020

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

SUMMARY

The year 2020 was tumultuous for financial markets. The COVID-19 pandemic threw the world into chaos early in the year, with the S&P 500® falling 33.8% between Feb. 19, 2020, and March 23, 2020. Governments and central banks pulled out their playbooks from the global financial crisis of a decade earlier and acted swiftly to increase spending and ease monetary policy. Financial markets rapidly recovered, with the S&P 500 regaining its all-time high by August and ending the year up 18.4% after shrugging off U.S. election histrionics.

The torrent of liquidity depressed interest rates and pushed up asset prices nearly everywhere investors looked. Of the 31 distinct benchmarks tracked by this report, 30 finished with a positive return for 2020; the S&P United States REIT (-7.5%) was the only exception.

The positive market performance broadly translated into good absolute returns for active fund managers. While the turmoil and disruption caused by the pandemic should have offered numerous opportunities for outperformance, 57% of domestic equity funds lagged the S&P Composite 1500® during the one-year period ending Dec. 31, 2020.

SPIVA US Year-End 2020 Exhibit 1

Large-cap funds picked up where they left off the previous decade—for the 11th consecutive one-year period, the majority (60%) underperformed the S&P 500. Mid-cap (51%) and small-cap (46%) funds did somewhat better relative to the S&P MidCap 400® and S&P SmallCap 600®, respectively.

The ongoing growth versus value battle firmly tilted toward growth in 2020. The pandemic boosted the fortunes of those positioned to take advantage of changing lifestyles, with the S&P 500 Growth returning 33.5%, while the S&P 500 Value managed a meager 1.4%. A healthy 62% of large-cap growth funds, 83% of mid-cap growth funds, and 86% of small-cap growth funds topped the S&P 500 Growth, S&P MidCap 400 Growth, and S&P SmallCap 600 Growth, respectively. However, this did little to improve their longer-term relative performance, as on a 20-year horizon a paltry 4%, 10%, and 6% of large-, mid-, and small-cap growth funds beat their benchmarks, respectively.

Active value funds posted more mixed results. While 67% of large-cap value funds beat the S&P 500 Value, just 47% of mid-cap value funds and 56% of small-cap value funds were able to do so. Nevertheless, 20-year results showed a similar decline to growth funds, as just 23%, 15%, and 24% of large-, mid-, and small-cap value funds outperformed their benchmarks, respectively.

For U.S. funds looking outside of the country, relative results in 2020 were a toss-up. Roughly 50% of global, international, international small-cap, and emerging markets funds beat the S&P Global 1200, S&P International 700, S&P Developed Ex-U.S. SmallCap, and S&P/IFCI Composite, respectively. This clustering artifact remained, but the poor results widened when viewed over three years (about 60% underperforming), five years (about 70%), or 20 years (about 90%).

Gorging on central bank largesse, the long-tenor bonds of the Bloomberg Barclays US Government Long returned a spectacular 17.6% for the year. The government long funds charged with targeting this index failed in spectacular fashion, as fewer than 6% were able to clear this hurdle. In 3 of the 14 fixed income categories tracked (government long funds, investment-grade long funds, and loan participation funds), more than 90% of funds failed to clear their benchmarks in 2020. Better results were generally found in the intermediate and shorter-dated tenors for 2020.

Echoing the results from equities, longer observation horizons offered little sanctuary. More than 60% of funds underperformed their benchmarks across all fixed income categories over the 15-year horizon; in 10 of the 14 categories tracked, more than 80% of funds came up short.

The SPIVA Scorecard's accounting for survivorship bias continues to be a valuable cautionary tale. As has generally been the case in recent years, roughly 5%-10% of funds across asset classes and categories were merged or liquidated in 2020. Over 20 years, nearly 70% of domestic equity funds and two-thirds of internationally focused equity funds across segments were confined to the history books.

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SPIVA Australia Year-End 2020

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Arpit Gupta

Senior Analyst, Global Research & Design

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Tim Wang

Senior Analyst, Global Research & Design

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 18 years of experience publishing the report by expanding scorecard coverage into Australia, Canada, Europe, India, Japan, Latin America, and South Africa.
  • The SPIVA Australia Scorecard reports on the performance of Australian active funds against their respective benchmark indices over different time periods. In this scorecard, we evaluated returns of over 897 Australian equity funds (large, mid, and small cap, as well as A-REIT), 475 international equity funds, and 112 Australian bond funds.
  • Strong recovery was seen in equity markets after sell-offs in February and March 2020. Apart from Australian A-REIT funds, the majority of active funds across various equity fund categories, Australian Equity General, Australian Equity Mid- and Small-Cap, and International Equity General, outperformed their respective benchmarks in the second half of 2020.
  • Average Australian Bond funds started outperforming the benchmark since April 2020. In the second half of 2020, more than 80% of Australian Bond funds beat the S&P/ASX Australian Fixed Interest 0+ Index with an equal-weighted average excess return of 0.7%.

SPIVA Australia Year-End 2020 - Exhibit 1

  • Australian Equity General Funds: The S&P/ASX 200 gained 13.2% in the second half of 2020, while Australian Equity General funds enjoyed higher returns of 14.6% and 15.0% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending December 2020, only 39.3% and 55.6% of funds were beaten by the benchmark, respectively, which were much lower than the observations over the 3- and 5-year horizons.  However, over 7% of funds in this category were liquidated in 2020.
  • Australian Equity Mid- and Small-Cap Funds: The S&P/ASX Mid-Small had a strong return of 21.7% in the second half of 2020, while the Australian Equity Mid- and Small-Cap funds recorded bigger gains. Funds with smaller assets tended to suffer more losses during the first half of 2020, but they tended to perform better during the recovery in the second half, with the equal-weighted returns exceeding the asset-weighted return by more than 1%.  Over the 6- and 12-month periods ending December 2020, 34.1% and 53.0% of funds failed to outperform the benchmark, respectively.
  • International Equity General Funds: The international equity market recorded smaller gains than the Australian equity market in the second half of 2020. The S&P Developed Ex-Australia LargeMidCap marked a return of 10.2% and more than half of the International Equity General funds outperformed the benchmark over this period.  Over the 6- and 12-month periods, the equal-weighted returns exceeded the asset-weighted returns by 1.7% and 2.3%, respectively, indicating funds with smaller assets tended to perform better than their peers with larger assets in the past year.
  • Australian Bond Funds: The S&P/ASX Australian Fixed Interest 0+ Index recorded a narrow gain of 0.9% in the second half of 2020, though the Australian Bond funds recorded higher returns of 1.6% and 1.8% on equal- and asset-weighted bases, respectively. Over the 6- and 12-month periods ending December 2020, only 16.7% and 39.4% of funds underperformed the benchmark in this category, which was the most favorable among active funds across all SPIVA fund categories.
  • Australian Equity A-REIT Funds: The S&P/ASX 200 A-REIT gained 21.2% in the second half of 2020, though more than half of the Australian Equity A-REIT funds underperformed the benchmark, recording slightly smaller returns of 20.7% and 20.4% on equal- and asset-weighted bases, respectively. In 2020, 54.5% of funds in this category did not outperform the benchmark and the equal- and asset-weighted average returns lagged the benchmark return by 1.3% and 1.7%, respectively.
  • Fund Survivorship: In 2020, the overall fund liquidation rate across all categories was 6.1%, which was higher than the rate of 3.5% in 2019. The highest liquidation rates were seen in the Australian Equity General and Australian Equity A-REIT fund categories.  In 2020, 7.1% of Australian Equity General funds were liquidated, compared with 1.8% in 2019.  The liquidation rate of Australian Equity A-REIT funds was 7.6% in 2020, much higher than the rate of 2.9% recorded in 2019.

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