Another Bulls*** Myth Debunked

“The large cap space is too competitive so active managers do a much better job in small caps, where their skills add value.”

You’ve heard that before. A lot. Except it isn’t true. At least not over any length of time that actually matters.

S&P Dow Jones Indices is out with their latest SPIVA Scorecard, with complete findings for end-of-year 2014. It turns out that small-cap stockpicking didn’t do investors any favors relative to the benchmark index, once again.

Here’s SPDJI (emphasis mine)

The S&P 500® had its third straight year of double-digit gains in 2014, returning 13.69% (returns were 32.39% in 2013 and 16% in 2012). Based on data as of Dec. 31, 2014, 86.44% of large-cap fund managers underperformed the benchmark over a one-year period. This figure is equally unfavorable when viewed over longer-term investment horizons. Over 5- and 10-year periods, respectively, 88.65% and 82.07% of large-cap managers failed to deliver incremental returns over the benchmark. 

The returns of 66.23% of mid-cap managers and 72.92% of small-cap managers lagged those of the S&P MidCap 400® and the S&P SmallCap 600® , respectively, on a one-year basis. Similar to the results in the large-cap space, the overwhelming majority of mid- and small-cap fund managers underperformed their benchmarks over the longer-term horizons as well.

It is commonly believed that active management works best in inefficient environments, such as small-cap or emerging markets. This argument is disputed by the findings of this SPIVA Scorecard. The majority of small-cap active managers have been consistently underperforming the benchmark over the full 10-year period as well as each rolling 5-year period, with data starting in 2002.

Josh here, as you can see in the scorecard below, 87.75% of all small cap funds did not beat their benchmark over the 10-year period ending December 31st 2014. That’s actually worse than the overall domestic funds universe, where close to 24% were able to outperform.

Yes, the good news is that 12% of small cap funds were able to beat the SmallCap 600 index over the last decade, but these funds probably had two things in common:

1. low fees
2. you could not have identified them in advance

spiva

Why does this matter? Because, according to Morningstar, the average expense ratio for a small-cap fund is 1.61%. That’s a huge internal cost that investors being sold these funds do not see – but that take a giant chunk out of their returns over years and decades. And for what? The 12% chance they picked the right one?

I wish it weren’t so, but it is what it is.

Source:

SPIVA U.S. Scorecard, Year-end 2014

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web