Does the S&P outperform active funds?

Does the S&P outperform active funds?Standard & Poor’s Index Services released today the year-end 2008 results for its Standard & Poor’s Index Versus Active Fund Scorecard (SPIVA).  The key findings are summarized below.  SPIVA draws its underlying data from University of Chicago’s CRSP Survivor-Bias-Free U.S. Mutual Fund Database.  To view the report click here (Standard & Poor’s Indices Versus Active Funds Scorecard, Year End 2008).

A summary of the results:

  • Over the five year market cycle from 2004 to 2008, S&P 500 outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003.
  • The belief that bear markets favor active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.
  • Benchmark indices outperformed a majority of actively managed fixed income funds in all categories over a five-year horizon. Five year benchmark shortfall ranges from 2-3% per annum for municipal bond funds to 1-5% per annum for investment grade bond funds.
  • The script was similar for non-U.S. equity funds, with indices outperforming a majority of actively managed non-U.S. equity funds over the past five years.

A brutal bear market is tough enough, but there’s no reason to underperform the target index and pay more taxes due to high turnover.  Index mutual funds and ETFs have shown once again that costs matter and that “winning by not losing” is an effective strategy.

About the author

Tim Kober, CFP®

Tim Kober is the founding principal of Cedar Financial Advisors, LLC, an independent, fee-only financial planning firm based in Portland, Oregon. Tim specializes in providing Fee-Only financial planning, investment advice, and hourly consulting to individuals and families.

Prior to founding Cedar Financial Advisors, Tim spent 18 years as a Director of Strategic Planning and other Senior Management positions at Intel Corporation. He played a key role in creating and managing several successful businesses and product lines, and was valued as a trusted advisor to executives and as a leader/mentor to his team.

Tim has taken his passion for investing, solving problems and helping others and applied it to personal financial planning. He applies the same strategic thinking, problem solving, organizational, and communications skills that made him highly effective in a corporate setting to help individuals and families define and realize their personal goals.

Recognizing the critical need for fiduciary financial advisors that help clients reach their goals using sound, academically proven investment strategies, Tim established Cedar Financial Advisors, LLC.

Blessed with a wonderful wife and child, Tim loves outdoor activities such as hiking, cycling, alpine skiing, and tennis. In 2007 he rode in Cycle Oregon, an annual six day cycling adventure. He is active volunteer in his community and at his daughter’s school.

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