Active Management Can’t Crack Inefficient Markets

Larry Swedroe unpacks the newly released year-end 2017 SPIVA report and its look at active management’s underwhelming performance.

Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) scorecards, which compare the performance of actively managed equity mutual funds to their appropriate index benchmarks.

The 2017 report includes 15 years of data. Following are some of its highlights:

  • In 2017, 63% of large-cap managers, 44% of midcap managers and 48% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively. However, over longer periods, the results were dismal.
  • Over the five-year period ending 2017, 84% of large-cap managers, 85% of midcap managers and 91% of small-cap managers lagged their respective benchmarks. Similarly, over the 15-year investment horizon, 92% of large-cap managers, 95% of midcap managers and 96% of small-cap managers failed to outperform on a relative basis. Note the poor performance in small-caps, supposedly the most inefficient asset class, where just 4% of active funds outperformed their benchmark index. Even worse was the performance turned in by small-cap growth managers, where 99% underperformed. The least-poor performance was in REIT funds, where 82% failed to beat their benchmark.
  • In 2017, with the exception of actively managed international small-cap equity funds, the majority of active managers investing in global, international and emerging market funds underperformed their respective benchmarks. Again, the results deteriorated as the horizon lengthened.
  • Over the 3-, 5-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks, and the longer the time horizon, in general, the more funds underperformed.
  • Over the last 15 years, on an equal-weighted (asset-weighted) basis, the average actively managed equity fund underperformed by 1 percentage point (0.6 percentage points). Again, the worst performances were in the small-cap category, with active small-cap growth managers underperforming on an equal-weighted (asset-weighted) basis by 2.8 percentage points (1.6 percentage points), active small-cap managers underperforming by 2.2 percentage points (1.8 percentage points) and active small value managers underperforming by 1.7 percentage points (1.5 percentage points), respectively. So much for the idea that the asset class is inefficient.
  • Over the 3-, 5-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their respective benchmarks. Over the 15-year horizon, 82% of active global funds underperformed, 92% of international funds underperformed, 78% of international small-cap funds underperformed and, in the supposedly inefficient emerging markets, 95% of active funds underperformed.
  • Over the 15-year horizon ending 2017, on an equal-weighted (asset-weighted) basis, active global funds underperformed by 1.3 percentage points (0.2 percentage points), active international funds underperformed by 2.0 percentage points (0.8 percentage points) and active international small funds underperformed by 0.9 percentage points (0.2 percentage points). In the supposedly inefficient asset class of emerging markets, active funds produced the worst performance, underperforming by 2.6 percentage points (1.5 percentage points).
  • Highlighting the importance of taking into account survivorship bias, over the 15-year period, more than 58% of domestic equity funds, 55% of international equity funds and approximately 47% of all fixed-income funds were merged or liquidated.

While I believe the preceding data is compelling evidence of the active management industry’s failure to generate alpha, it’s important to note that all the report’s figures are based on pretax returns. Given that actively managed funds’ higher turnover generally makes them less tax efficient, on an after-tax basis, the failure rates would likely be much higher (taxes are often the greatest expense for active funds).

Fixed-Income Performance Just As Poor

The performance of actively managed funds in fixed-income markets was just as poor. The following results from the report are for the 15-year period:

  • The worst performance was in long-term government bond funds, long-term investment-grade bond funds and high-yield funds. In each case, just 2% of active funds beat their respective benchmarks. On an equal-weighted (asset-weighted) basis, long-term government bond funds underperformed by a shocking 3.3 percentage points (2.8 percentage points), long-term investment-grade bond funds underperformed by 2.5 percentage points (2.0 percentage points) and high-yield funds underperformed by 2.2% percentage points (1.6 percentage points).
  • For domestic bond funds, the least poor performance was in short-term investment-grade funds, where 69% of active funds underperformed. On an equal-weighted basis, their underperformance was 0.6 percentage points. However, on an asset-weighted basis, they outperformed by 0.3 percentage points. This result possibly could be explained by the funds having held longer maturities (that is, they took more risk) than their benchmarks.
  • Active municipal bond funds also fared poorly, with between 83% and 89% of them underperforming. On an equal-weighted (asset-weighted) basis, the underperformance was between 0.6 percentage points and 0.7 percentage points (0.1 percentage point and 0.4 percentage points).
  • Active emerging market bond funds fared poorly as well, as 67% of them underperformed. On an equal-weighted basis, the underperformance was 1.4 percentage points. On an asset-weighted basis, the underperformance was 0.3 percentage points.


The SPIVA scorecards continue to provide powerful evidence on the persistent failure of active management’s ability to generate alpha (risk-adjusted outperformance). In particular, they serve to highlight the canard that active management is successful in supposedly inefficient markets like small-cap stocks and emerging markets.

The scorecards also provide compelling support for Charles Ellis’ observation that, while it’s possible to win the game of active management, the odds of doing so are so poor that it’s not prudent to try—which is why he called it “the loser’s game.” And it’s why we continue to see a persistent flow of assets away from actively managed funds.

This commentary originally appeared March 23 on

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