“No one hits .400 anymore because the average baseball player of today is far better than the average player of a hundred years ago” (The Incredible Shrinking Alpha by Swedroe and Berkin)
This phenomenon is called the “paradox of skill”. Baseball hitters are faster, stronger, and better than the old days but, so are the pitchers! Importantly, the dispersion of skill in the major leagues has narrowed.
Perhaps that is one reason why it is getting tougher for active investment managers to beat indices? Investment managers have grown in number and have gotten better – so there are fewer and fewer mispriced securities. Less low hanging fruit, if you will. High fees and expenses are another reason.
The SPIVA data is in for the year ending 2015. S&P Indices Versus Active (SPIVA) measures the performance of actively managed funds against their relevant S&P index benchmarks. Managers continue to lag their benchmarks over 1, 3 and 5 years periods.
The table below shows the Percentage of U.S. Equity Funds outperformed by their benchmarks through year end 2015.
Data: Standard and Poor’s Financial Services, LLC
Note: U.S. Large Cap, Developed Int’l and Emerging Market benchmarks are the S&P 500, the S&P 700, and the S&P/IFCI Composite, respectively.
It did not get better in the first quarter! An FT article (4/6) titled Investors rake over ashes of a dismal quarter observed:
“The latest numbers from BofA Merrill Lynch’s quantitative team suggest that the first quarter of this year was the worst since the bank’s records began in 1998, when judging US equity funds against their benchmarks. In none of all the many market breaks and crises in the 18 years since then have they so comprehensively failed to take advantage of the opportunities the market offered them.
Overall, just 19% of US equity funds beat their benchmark, while only 6% of large-cap funds beat their index, an almost unimaginably bad record.”
The article concludes with:
“The first quarter of 2016 will add to the serious damage that has already been done to active funds’ attempts to market themselves. A key marketing point against passive funds is that they cannot take evasive action when market conditions turn difficult. Active managers can help ease the turbulence.
The first quarter was a great opportunity for them to prove their worth. Judged collectively, it is hard to see how they could have failed more miserably.”
It’s tough to beat the market. Especially if you are a market timer with high expenses and high turnover. It’s why we believe a low cost, low turnover, diversified, index oriented, stay the course approach to investing is best. It’s doable. It WORKS.
Jeff Pantages, CFA®
Senior Vice President, Investments