S&P Dow Jones Indices has long provided a great service to investors with its semi-annual S&P Indices Versus Active (SPIVA) scorecards. The evidence offered in these reports has shown time and again that, regardless of the asset class, the vast majority of active managers persistently fail to outperform their benchmarks, and that there is little to no persistence of performance beyond the randomly expected.
Thus, while we know that there will almost certainly be some small percentage of active mutual fund managers who will outperform in the future, being unable to use past performance as a predictive metric means there is no reliable way to identify them ahead of time.
S&P Dow Jones Indices recently produced a new study that looks not just at the returns of actively managed funds, but also at their volatility (one measure of risk). One purpose of the study was to test whether past volatility was predictive of future volatility. The following is a summary of the author’s findings:
The bottom line is that the evidence shows investors were not able to improve their returns relative to the market either by investing in higher-volatility actively managed funds (taking more risk) or by investing in low-volatility actively managed funds. In other words, the study provides further evidence that active management is a loser’s game; while it’s a game that’s possible to win, the odds of doing so (especially for taxable investors) are too low to make playing a prudent decision.
This commentary originally appeared November 2 on MutualFunds.com
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