More evidence that it’s really hard to ‘beat the market’ over time, 95% of finance professionals can’t do it

S&P Dow Jones Indices, the “de facto scorekeeper of the active versus passive investing debate,” just released its SPIVA U.S. Mid-Year 2018 report (see other reports here for Europe, Latin America, Canada, Australia, India, Japan, etc.). Here’s an overview of the SPIVA Scorecard:

There is nothing novel about the index versus active debate. It has been a contentious subject for decades, and there are few strong believers on both sides, with the vast majority of market participants falling somewhere in between. Since its first publication 16 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. For more than a decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.

And here are some highlights of the 2018 Mid-Year SPIVA US Scorecard (bold added):
  • Despite the market turmoil seen in the first quarter of 2018, the U.S. equity market posted positive returns over the 12-month period ending June 30, 2018, with small-cap stocks leading the pack. The S&P SmallCap 600 reported 20.50%, while the S&P 500 and the S&P MidCap 400 posted 14.37% and 13.50%, respectively.
  • During the one-year period ending June 30, 2018, the overall percentage of all domestic funds outperforming the S&P Composite 1500 increased (42.02%) compared with six months prior (36.57%).
  • Over the one-year period, 63.46% of large-cap managers, 54.18% of mid-cap managers, and 72.88% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
  • Despite small-cap equity performing the best, more small-cap managers underperformed the S&P SmallCap 600 over the one-year period compared with results from six months prior.
  • Overall performance of active equity funds relative to their respective benchmarks over the medium term also improved, although the majority still underperformed their benchmarks. Over the five-year period, 76.49% of large-cap managers, 81.74% of mid-cap managers, and 92.90% of small-cap managers lagged their respective benchmarks.
  • Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.

MP: Stated differently, over the last 15 years from June 30, 2003 to June 30, 2018, only one in 13 large-cap managers, only one in 21 mid-cap managers, and one in 43 small-cap managers were able to outperform their benchmark index. So it is possible for some active fund managers to “beat the market” over various time horizons, although there’s no guarantee that they will continue to do so in the future. And the percentage of active managers who do beat the market is usually pretty small – fewer than 8% in most of the cases above over the last 15 years; and they may not sustain that performance in the future. For many investors, the ability to invest in low-cost, passive, unmanaged index funds and outperform 92% of high-fee, highly paid, professional active fund managers seems like a no-brainer, especially considering it requires no research or time trying to find the active managers who beat the market in the past and might do so in the future.

Here’s an analogy, perhaps it’s not perfect: Suppose you could be guaranteed to score in the 95th percentile on the LSAT, MCAT, GRE, or GMAT exam without studying for even one minute. Wouldn’t that be appealing to most people compared to the alternative of spending a lot of time studying and probably getting a lower score? If I can out-perform 95% of active managers with a Vanguard or Fidelity index fund for almost free (0.04% expense ratio), that choice to me seems easy: go with index investing.

Here’s a golf analogy from Burton Malkiel:

It’s true that when you buy an index fund, you give up the chance to boast at the golf course that you picked the best performing stock or mutual fund. That’s why some critics claim that indexing relegates your results to mediocrity. In fact, you are virtually guaranteed to do better than average. It’s like going out on the golf course and shooting every round at par. How many golfers can do better than that? Index funds provide a simple low-cost solution to your investing problems.

If I’m reading this United States Golf Association chart correctly, golfing every round at par would make you a “scratch golfer” (close to a 0 handicap) and would place you in about the top 2% of all golfers. And extending the index investing-golf analogy, using index funds is the equivalent of being a “scratch golfer” without even having to practice, buy expensive golf clubs, or take lessons from pros, and you also get the additional benefit of paying much lower green fees (or private club fees) than most golfers who do practice incessantly, invest in the best golf equipment and take private lessons! Sign me up for that deal!

Related: Here are 17 quotations below about index investing, collected from various sources, investors, economists and fund managers:

1. “Building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic.” ~Bethany McLean of Fortune

2. “The S&P 500 Index consistently outperformed 98% of mutual fund managers over the past three years and 97% over the past 10 years, ending October 2004. In two 30-year studies, the S&P 500 outperformed 97% and 94% of managers. In addition, only about 12% of the top 100 of managers repeat their performance in the following years. Therefore, it is not possible to consistently pick next year’s hot mutual fund manager.” From

3. “Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2% in favor of index funds.” ~John Bogle, founder of Vanguard

4. “No matter where we look, the message of history is clear. Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.” ~John Bogle, founder of Vanguard

5. “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund.” ~Warren Buffett, Chairman, Berkshire Hathaway

6. “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” ~Warren Buffett, Chairman, Berkshire Hathaway

7. “Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.” ~Andrew Smithers and Stephen Wright, authors of “Valuing Wall Street”

8. “I own last year’s top performing funds. Unfortunately, I bought them this year.” ~Anonymous

9. “After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding ‘no.’” ~Eugene Fama, Professor at University of Chicago and Nobel Economist

10. “Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (vs. an index fund) by incurring transaction costs.” ~Burton Malkiel, Professor, Princeton

11. “The revenge of Vanguard founder John Bogle continues apace. As investors figure out that they are not good at stock-picking or managing trades, they have also learned that most professionals are not much better. Paying high mutual fund expenses to a manager who under-performs a benchmark makes little sense. This realization has led to the rise of inexpensive exchange-traded funds and indices.” ~Barry Ritholtz

12. “All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage. Unless you were fortunate enough to pick one of the few funds that consistently beat the averages, your research came to naught. There?s something to be said for the dart?board method of investing: buy the whole dart board.” ~Peter Lynch, Legendary Manager of Fidelity Magellan

13. “The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors. In fact, one of the reasons that actively managed equity funds under?perform stock index funds is because they are spending so much money to advertise — money that otherwise would be invested on behalf of the mutual fund shareholders.” ~Internet Advisor, ?The Motley Fool ?

14. “If active and passive management styles are defined in sensible ways, it must be the case that: 1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and, 2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.” ~William F. Sharpe, Professor of Finance, Nobel Laureate

15. “Indexing is a marvelous technique. I wasn?t a true believer. I was simply an ignoramus. Now I am a convert. Indexing is an extraordinary sophisticated thing to do. If people want excitement, they should go to the racetrack or play the lottery.” ~Douglas Dial, Portfolio Manager of the CREF Stock Account Fund, largest pension fund in America

16. “Index funds should outperform most other stock?market investors. After all, investors, as a group, can do no better than the market, because collectively we are the market. Most investors, in fact, are destined to trail the market because we are burdened by investment costs such as brokerage commissions and fund expenses.” ~Jonathan Clements, Columnist, Wall Street Journal

17. “It’s unlikely that you’ll spot many dog-eared copies of A Random Walk floating amongst the Wall Street set (although bookshelves at home may prove otherwise). After all, a “random walk”–in market terms–suggests that a “blindfolded monkey” would have as much luck selecting a portfolio as a pro.” review of the 10th edition of “Random Walk Down Wall Street.”

More evidence that it’s really hard to ‘beat the market’ over time, 95% of finance professionals can’t do it


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