Indices continue to lead: SPIVA

It was tough for active fund managers to beat the S&P/TSX Composite in 2009, according the full year Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA).

Only 30.4% of Canadian Equity active funds posted returns superior to the S&P/TSX Composite Index. Canadian small- and mid-cap equity managers were better able to beat their index, with 52% of active funds in the category beating the S&P/TSX SmallCap Index.

It could be a question of market efficiency, as the Canadian small- to mid-cap universe is covered by far fewer analysts than the large-cap universe, making it more likely that a dedicated research team will uncover hidden gems.

Outside of the Canadian equity realm, the results were similar: 39.7% of U.S. equity fund managers beat the S&P 500 index, while the lesser known S&P EPAC LargeMidCap Index was beaten by roughly 52% of international equity managers.

“Passive investing provides a cost efficient way to access capital markets,” says Jasmit Bhandal, director at S&P Indices in Canada. “For many investors the investment process is quite opaque. In contrast, an indexed approach gives you a transparent, rules-driven framework for investing.”

Active managers fared much better in the Canadian focused equity category, with 61% beating a blended index made up of 50% S&P/TSX Composite, 25% S&P 500 and 25% S&P EPAC LargeMidCap.

The authors of the SPIVA report point out that single multi-year returns likely provide a more useful illustration, since investors typically hold onto their funds for a period of longer than a year.

On a five year time horizon, outperformance dropped dramatically. Only 7.45% of active Canadian equity managers beat the index, and 9.15% of U.S. equity managers beat the S&P 500. Active managers did their best work in the Canadian focused equity space, with 39.73% beating the blended benchmark.

(02/25/10)