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(August 25, 2006) The latest salvo has been fired in the debate over active-versus-passive management, with the release of the Standard & Poors latest scorecard on performance.

According to the S&P’s Indices Versus Active Funds Scorecard (SPIVA) for Canada, 81.2% of actively-managed Canadian equity funds underperformed the S&P/TSX Composite Index in the first six months of 2006.

Actively-managed U.S. equity funds fared a little better, with 61.4% underperforming the S&P 500 Index. In the small-cap space, S&P announced that “only 48.4%” of Canadian small-cap equity funds beat the S&P/TSX SmallCap Index.

Of course, funds that mimic the index — either unofficially or by mandate — will always underperform the index, net of fees. The SPIVA report does not differentiate between truly active management and closet indexers, which inevitably drag on overall performance measures.

“Active managers are having a hard time in this year’s volatile markets,” said Jasmit Bhandal, director of business development at S&P’s Canadian index services. “In particular, there has been a shift in the small-cap space, where over the last few quarters we had seen active managers adding value above and beyond the index. Year-to-date, fewer active small-cap funds have been able to beat the index.”

A smaller percentage of Canadian active funds managed to beat the index over a longer time horizon, however. Over the five-year period, 13.9% of Canadian equity funds outperformed the S&P/TSX Composite.

Over five years, 43.8% of Canadian small-cap funds have beaten the S&P/TSX SmallCap Index, and 25% of U.S. equity funds have outperformed the S&P 500 Index.

One source of the discrepancy that the SPIVA corrects for is survivorship bias, which can artificially boost the number of active funds outpacing the indices. S&P reports that as many as one-third of active funds were merged or liquidated in the past five years, which would typically eliminate some weaker performers.

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U.S. slowdown would hit forestry: Banks

(August 25, 2006) Economists at some of the big banks are predicting a slowdown in the U.S. economy, following disappointing housing sales data released this week.

“The combination of lower sales and bloated inventories helped drive median price increases for both new and existing homes below 1%, a far cry from the double-digit price increases observed less than a year ago,” wrote TD economist David Tulk, in the bank’s “Weekly Bottom Line” note.

While a slowdown in the U.S. is rarely good news north of the border, BMO economist Bart Melek points out that the already-troubled softwood lumber industry will likely feel an even tighter pinch as demand for construction materials drops off.

“Lumber prices are trending near a three-year low as U.S. housing news gets progressively worse. The latest new-home sales numbers are 21% below a year ago and inventories are at an 11-year high,” he writes. “Combine this with an oversupplied existing home market, and a sharp drop in housing starts looks like a lock. This will drive lumber demand down and keep prices low, making it a painful environment for producers.”

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(08/25/06)