Is active management justified in some asset classes?

A common refrain from advisors recommending actively managed funds for client portfolios sounds something like this:

“We’ll use index funds in efficient markets such as large cap US stocks, but active managers can add value in other asset classes such as small cap US stocks and emerging markets.”

This half-admission of the merits of a passive investment strategy can typically defuse difficult questions some advisors face from their clients about the use of lower cost and more tax-efficient investment vehicles than the advisor currently recommends.  But does this statement have merit?  Do active managers perform better in “less efficient” asset classes?

Data is easy to come by. Standard & Poors’ Index Versus Active (SPIVA) is among the leading resources for standardized measurement of investment performance data. The semi-annual scorecard shows readers results across practically all asset classes, comparing actively managed funds to their respective benchmarks over multiple rolling periods. So how did small cap, international and emerging markets managers fare in the most recent results?

The results for small cap funds are not pretty. In the most recent 1, 3 and 5 year rolling periods, 90.95%, 83.89% and 77.73% of managers were bested by their benchmarks, respectively.  That means that in the trailing 12 months (ending 6/30/12), less than 10% of actively managed small cap funds beat their benchmark.

International funds fared better over the most recent 12 month period, but still over half were beaten by the benchmark.  Over the same 1, 3 and 5 year periods, 54.29%, 66.08% and 73.65% of international funds lost to the benchmark.

Calculations for emerging market managers are similar with 50.27%, 66.44% and 83.72% of managers losing to the benchmark over 1,3 and 5 year periods.

Another favored “active” asset class often recommended by advisors is high-yield bonds.  The argument here is that a skilled manager can add value by avoiding the most risky securities in an already risky space.  And how do the numbers stack up?

Through 6/30/12, active high yield managers were beaten by the benchmark at a rate of 83.1%, 90.50% and 94.78% over the trailing 1, 3 and 5 year periods. So much for added value.

But what about the few who did outperform?  Are they identifiable and can the outperformance be repeated? SPIVA has an additional reported called the “Persistence Scorecard” which tells readers the frequency that top-tier investment managers can stay above the average of their peer group. Sadly, the results show that performance consistency among active managers is worse than we could expect from a completely random distribution of results.  That is, any performance consistency can just as easily be considered luck. You would statistically be better off flipping coins than finding an active manager who consistently beats the market. 

You can download the full version of the most recent SPIVA Scorecard here:, and download the most recent Persistence Scorecard here:

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