Have We Been Looking at Active Performance All Wrong?

It all depends on how you look at it.

The S&P Indices Versus Active scorecards have long delivered a bleak message for active management: Most funds simply underperform their benchmarks over time. Roughly 90% of actively managed large-cap funds lagged the S&P 500 over the past 15 years, per the latest data. But a recent study backed by the Investment Adviser Association Active Managers Council wants to change that narrative. It argues SPIVA’s methodology may not reflect what clients actually experience when allocating to active mutual funds and exchange-traded funds. It could flip the script on the active management story, warranting another look from all those passive-loving advisors.

“[SPIVA’s] statistics are calculated correctly, but the way they’re calculated is not very well tailored to actual investment decision-making,” said Tim Riley, study author and University of Arkansas associate professor. “SPIVA gives the impression that passive is dominant and the clear answer for what you should be picking, but a much more balanced portrayal is needed.”

Change Up

The researchers said three adjustments would paint a more accurate picture of active management performance. First, SPIVA treats funds that close before the end of a time horizon as underperformers. Riley argued that approach ignores funds that may have delivered strong returns for years before shutting down. “For investors, if we give you 19 years of great performance and then close, that still creates a lot of value,” he told ETF Upside.

Second, the report weighs all funds equally regardless of size. That means a $5 million fund counts the same as a $10 billion strategy, even though far more clients are exposed to the larger fund. Lastly, the researchers said active funds should be measured against investable passive funds rather than indexes that clients cannot directly buy. “On average, when we make that switch, there’s a lot more value to be active than when you compare against a hypothetical benchmark,” Riley said.

Under those alternative methods, the actively managed funds’ results look a bit different:

• Some 43% of domestic equity assets outperformed over the five years through 2024, nearly three times SPIVA’s figure of 15%.
• Similarly, in that same period, 86% of assets in high yield bond funds outperformed, in contrast to SPIVA’s report that just 46% of funds in the category outperformed.

“When we improve that tailoring, we see much stronger performance from active funds, especially among fixed income where that result completely flips,” Riley said.

Keep it Down. While many advisors still say passive strategies are superior, there is room for active management in portfolios. Regular Advisor Upside contributor Allan Roth said in a Morningstar report that active ETFs are generally better than active mutual funds, but not as good as the lowest-cost and most broad index ETFs. “Avoid expensive, flashy ETFs that can have outstanding performance and then often crash just as investors pour their money in,” he said.