Today, we're diving into something super important for anyone interested in mutual funds: the SPIVA Report, it's a big deal, and we'll break down why.
But before we get to that, a quick note about August 4th. Chris, Daryl, and I are getting together that day to figure out how we can do even more to help you, not just now, but for the rest of your life as we all get closer to retirement. This is a huge goal, and we'd love your input! What can we do to improve our educational materials? Please email me your ideas at paul@paulmerriman.com. We're thinking about everything, from AI's role to helping you build a portfolio that truly lasts a lifetime, send your thoughts my way!
The SPIVA Report: Active vs. Passive Investing
Alright, let's talk SPIVA. This report has been around since 2002, tracking the performance of active versus passive mutual funds. They analyze virtually every actively managed fund, comparing them to appropriate market indexes. They go to great lengths to ensure fair, "apples-to-apples" comparisons.
A crucial aspect they address is survivorship bias. Many underperforming funds get merged or liquidated. If you were investing, these funds were part of your initial choices. SPIVA accounts for all funds, not just the ones that survived, giving a much more accurate picture. This is a key difference from other reports that only look at surviving funds, which can make active management look better than it is. They also track style consistency – ensuring funds stick to their stated investment approach, unlike some active managers who might "drift" in their investments.
What the Data Reveals: The Long-Term Advantage
While single years can show active managers doing okay, the real story unfolds over longer periods. Let's look at large-cap core funds (like those tracking the S&P 500):
- 1 year: ~76% underperform.
- 10 years: 96% underperform!
- 15 years: 97% underperform!
- 20 years: 93% underperform.
This is a powerful reason why I advocate for index funds. They're built on a formula, not on human managers trying to guess market winners. Across almost all equity asset classes, over 90% of actively managed funds underperform over 20 years.
Why? The first advantage for index funds is lower expenses. While active fund fees have come down, they're still a major factor. The biggest hidden risk, though, is manager's picks and timing. Active managers try to beat the market with individual stock selections, but the data shows it's incredibly risky. (By the way the report doesn’t address taxes on active funds and that can be another 1% drain annually.)
SPIVA's quartile data highlights this: for small-cap value over five years, the top 25% of active funds started at 10% or more. But the bottom 25% earned significantly less than 7.8%. This means you're taking on volatility and the risk of vastly underperforming your chosen asset class.
The report directly compares index returns to the average active fund in the same asset class. For small-cap value over 10 years, the index compounded at 8.2%, while the average active fund hit 7.3% – nearly a 1% difference! Over 20 years, for small-cap VALUE funds, the index returned 9% versus 7.4% for the average fund. These seemingly small differences translate into millions of dollars over a lifetime.
Survivorship & Patience
Another eye-opening stat: over 20 years, only 36% of all domestic funds are still in business. For large-cap growth, where the action has been recently, only 26% of funds from 20 years ago are still around. This suggests poor performance led to closures or mergers, hiding underperformance from investors.
In the end, you, the investor, are the hardest worker. Your discipline to stay the course during tough times is paramount.
The SPIVA report is a quality piece of research, factual and fair. While the future won't be identical to the past, it often "rhymes." The longer your investment horizon, the more likely choosing index funds
(traditional or non-traditional) will lead to success, avoiding performance that may be more luck than skill. Patience is key, and we want you to have patience in owning funds with a very high probability of success.
We are rooting for your investment success, not just for you, but for your children and grandchildren! So, good luck, and don't forget to send those suggestions for our August 4th meeting to paul@paulmerriman.com.