You will be able to read a SPIVA scorecard from S&P Dow Jones Indices and explain what its main tables mean.
When Wei Ling asked her relationship manager whether active funds beat the market, he showed her a chart of her own fund beating its benchmark over the last year. When Arjun searched online, he found an article saying most active funds fail. Both of them had a piece of evidence, and neither could tell how much it was worth.
Lesson 6.1, Why active funds as a group trail the market after costs, showed what has to be true on average. This lesson looks at the most widely used source on what has actually happened: the SPIVA reports, published by S&P Dow Jones Indices. It explains what they measure and how to read one. It quotes none of their numbers, because those change with each edition and you will look them up yourself.
S&P Dow Jones Indices is an index provider, the firm behind well-known share indices such as the S&P 500, and it publishes regular reports called SPIVA scorecards, short for S&P Indices Versus Active. Each scorecard compares actively managed funds in a market with the benchmark index for their category, over several time periods.
There are scorecards for many regions, including the US, Europe, Japan, Australia and India, among others, each covering the funds sold in that market and divided into categories such as large-company shares, small-company shares, or bonds. New editions come out regularly, and you can download them free from the S&P Dow Jones Indices website.
If your fund invests in a market or category that a scorecard covers, that scorecard is the closest evidence for your situation. If none covers it exactly, the nearest one is still informative, but be careful about reading across.
The main table in a scorecard answers one question: in this category, over this period, what share of active funds did worse than the benchmark? The periods usually run from one year to fifteen or twenty years, so you can see whether the picture changes over time.
Three features make the counting more honest than a casual comparison.
First, the reports deal with survivorship bias: the error that comes from looking only at funds that still exist today. Funds that do badly are often closed or merged into other funds, and when they disappear, the survivors look better as a group than the full set of funds actually did. SPIVA counts funds that closed or merged during the period, and its scorecards usually include a table showing how many funds in each category survived.
Second, the reports show returns in two ways: equal-weighted, where every fund counts the same, and asset-weighted, where bigger funds count more. The second tells you how the average dollar did, which links back to Sharpe's arithmetic.
Third, they compare each fund with the benchmark for its own category, so a small-company fund is measured against a small-company index, not against a broad market index it was never trying to match.
Across most categories and most long periods, the scorecards have found that most active funds trailed their benchmarks. The exact share varies by region, category and period, and in some categories and some shorter periods, the result has been closer. So read the current scorecard for the region you care about, rather than a figure someone quoted in an article a few years ago.
The longer the period, the more consistent the finding has tended to be, which fits the arithmetic: a cost gap repeated every year adds up.
Knowing that most active funds trail on average does not settle your choice, because you are not buying the average fund. You are trying to pick a good one. The natural next question is whether funds that did well in the past keep doing well.
S&P Dow Jones Indices answers that in separate reports called persistence scorecards. They take the funds that ranked in the top group over one period and check how many stayed in the top group in later periods. If skill were easy to spot and stayed with a fund, many would stay on top. The persistence reports test whether that has happened, and how often top funds later fell to the bottom.
This is the evidence that bears most directly on picking an active fund from its track record, which is what most people, and most fund marketing, do.
Wei Ling downloaded the latest scorecard covering the region nearest her Asia equity fund. She found the main table, picked the category closest to her fund, and read across to the longest period shown. Then she checked the survivorship table to see how many funds in that category had closed over the same period.
In the activity below you will do the same: download the latest scorecard for one region and write down the share of active funds that underperformed over the longest period shown.
Download the latest SPIVA scorecard for one region and write down the share of active funds that underperformed over the longest period shown.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).