The Active Manger vs Index Report

The Active Manger vs Index Report

When it comes to investing, getting data to support your views comes in all sizes, shapes, and colors. Morningstar, the mutual fund and stock research firm, does a good job of sorting the performance of individual funds versus a specified benchmark and a fellow group of funds by awarding from five to one stars in peer-related performance. The winner is the five-star fund.

What does a five-star fund predict? Over the last two decades, various research reports have indicated that in the short term it might be a reliable indicator (out of several) for outperformance, but in the long term, it’s not so reliable. Yet each year we read reports that five-star funds attracted new money while one-star funds on the opposite end suffered withdrawals faster than other star ratings.  That looks like a solid prediction but it’s about cash flows and not future performance.

Richard Ferri, former money manager and author of several investment books including All About Index Funds, points to Standard & Poor’s Index Versus Active (SPIVA®) Report that was initiated in 2002. This year’s report came out a few weeks ago.

Once again, most large cap mutual fund managers failed to outperform their index, the S&P 500 for the 11th consecutive year in a row says the SPIVA report.  Here’s the whole U.S. stock market (S&P 1500) graph from the report:

The SPIVA U.S. Scorecard (plus other global reports) is something we financial planners and money managers look to each year to see if our recommendations will hold up under long-term scrutiny. Ever since I read Richard Ferri’s book on index funds (2003) I’ve been recommending it to our MainStreet Financial Planning clients. Yes, we are biased towards index funds.

For the individual investor, has commentary each year on the SPIVA reports and how they apply to decision making about investing in index funds versus active managers. Jack Bogle is credited with introducing the first index fund (S&P 500) in 1976 to individual investors at Vanguard Mutual Funds. You might suspect this group of commentators have an index bias.

So why are we so excited about the 2020 report? It shows that the scorekeeper (Standard & Poor’s) continues to document betting on index funds is a winning strategy in the long run. Your mileage may vary.

Jim Ludwick
Jim Ludwick

Jim Ludwick is the founder of MainStreet Financial Planning. His varied education and life experiences have enabled him to apply his knowledge and experience into useful solutions for personal financial problems. His writing and broadcasting activities allow him to help many more than just individual clients. He loves a microphone.

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