This is the second part of my four-part series on presenting to you the results of active-managed funds and passive funds. I will also be telling you what these data would mean in your personal finance.
However, there is still a need to explain some of the terms in the paper such that you may fully understand the significance of the results. So these are the things that you need to take note of:
1. Funds refer to the actively-managed funds and index refers to the market index that the funds are grouped against.
2. Funds assigned to the groups are judged based on the composition of their funds, having more than 75% weighting of large-cap stocks over a 3 year period would mean that the fund will be compared against the large-cap market index. The funds that have less than 75% weighting would be classified as multi-asset.
3. In each capitalization range, there would be growth, value and core. These are ways by which the weighting of the stocks are decided for the funds or the market. A growth fund/index would allocate a higher weighting to stocks of the capitalization range that are deemed to have higher growth potential (like ... uber? I'm not sure about that)
4. The 25th and 75th percentile returns of the different funds in their respective capitalization range would be used as gauge of variance for their return.
5. Fund performances are also categorized into asset-weighted, equal-weighted. As an example, asset-weighted calculated returns are calculated using the returns of the different funds of the capitalization range while taking into consideration the size of their respective managed asset. (Equal-weighted returns are calculated by taking the average return of the different funds of the capitalization range)
6. Global funds refers to funds that invest in stocks all around the world. International funds refers to funds that invest in stocks all over the world except US stocks
7. Returns of the funds are net of fees, excluding loads (Important)
8. The data are taken from SPIVA U.S. Scorecard 2017
Now that we are on the same picture, I shall now present to you the facts. Do take note that I will only look at the 15 years returns for funds and index. This is as I believe in the value of long-term investment.
Table of Large-cap, mid-cap, small-cap, multi-cap funds and their respective index
| Fund Category | Comparison Index | Percent of funds outperformed by index over 15-Years (%) |
|---|---|---|
| Large-cap growth funds | S&P 500 growth | 93.94 |
| Large-cap core funds | S&P 500 | 94.67 |
| Large-cap core funds | S&P 500 value | 85.71 |
| Mid-cap growth funds | S&P MidCap 400 growth | 95.32 |
| Mid-cap core funds | S&P MidCap 400 | 96.51 |
| Mid-cap value funds | S&P MidCap 400 value | 89.89 |
| Multi-Cap growth funds | S&P Composite 1500 growth | 86.21 |
| Multi-Cap Core funds | S&P Composite 1500 | 90.82 |
| Multi-Cap value funds | S&P Composite 1500 value | 86.96 |
From this table, it can be observed that for a time horizon of 15 years, sticking to the index would be the wise choice. This is as majority of funds are unable to beat the market. The study has also included 1 year, 3 years, 5 years and 10 years data too. However, due to the limitations of my HTML skills, I didn't include it in. Do check out the information yourself. But from the paper, we can see that over a longer period of time, lesser portion of funds would outperform the market. (Using Large-Cap funds, 1 year was 63.06%, 5 years was 84.23%, 10 years was 89.51%) This would mean that over a longer period, funds has a lesser tendency of outperforming the market. Do note that I am not saying that all actively-managed funds will underperform the market. What I am saying is that if you are not sure on the approach of selecting a competent fund, you will perform better by sticking to the market index.
Moving onto the next topic, where we will look at performance of funds against the index (Equal-weighted and asset-weighted). However, we will only look for the large-cap funds performance (Because I need to enter all these data into blogspot, it is really hard). There are arguments that the largest funds should return a larger return due to their scale and there must be a reason why so much money is managed by them right? Hence, we should expect that asset-weighted performance should fair a bit better than equal-weighted (look to the top where I defined how the asset-weight performance is derived.)
Average US funds and index 15-Years performance Equal-Weighted and Asset-Weighted
| Fund Category | 15-Year (Equal-Weighted) (%) | 15-Year (Asset-Weighted) (%) |
|---|---|---|
| Large-cap growth funds | 8.99 | 9.55 |
| S&P 500 Growth | 10.30 | 10.30 |
| Large-cap core funds | 8.09 | 8.45 |
| S&P 500 | 9.92 | 9.92 |
| Large-cap value funds | 8.19 | 8.80 |
| S&P 500 value | 9.38 | 9.38 |
From this table, comparing between the equal-weighted return and the asset-weighted returns, it can be observed that asset-weighted outperformed equal weighted return. So maybe there is some truth in saying a bigger fund might perform better compared to smaller funds. However, even asset-weighted still underperformed compared to the market. So, from this, we can see that there is a possible correlation between fund sizes and their performance compared to the market. Also, growth stocks have been favored by the market as compared to value stocks. (I have no idea what are the implications, I am presenting the facts.)
Next, we will be looking at the variance by calculating between the 25th and 75th percentile of the large-cap, mid-cap and small-cap funds. The variance should allow us to understand the spread of the funds in that capitalization range.
Spread of US funds and index 15 year performance
| Fund Category | 25th Percentile (%) | 75th Percentile (%) | Index Performance (%) | Difference (%) |
|---|---|---|---|---|
| Large-cap growth funds | 8.82 | 10.29 | 10.30 | 1.47 |
| Large-cap core funds | 8.20 | 9.63 | 9.92 | 1.43 |
| Large-cap value funds | 8.10 | 9.60 | 9.38 | 1.50 |
| Mid-cap growth funds | 9.49 | 11.39 | 11.97 | 1.90 |
| Mid-cap core funds | 9.38 | 10.81 | 12.00 | 1.43 |
| Mid-cap value funds | 9.15 | 11.34 | 11.90 | 2.19 |
| Small-cap growth funds | 10.22 | 11.61 | 12.64 | 1.39 |
| Small-cap core funds | 10.00 | 11.45 | 12.27 | 1.45 |
| Small-cap value funds | 9.94 | 11.59 | 10.17 | 1.65 |
From the table above, it can be observed that value funds have the biggest variance when compared to core and growth funds. This is applicable to all capitalization range. Also, at least 75% of funds would underperform the market (Except for large-cap and small-cap value funds).
So, we have looked at the long term performance of funds and their index, possibility of a correlation between size of funds and their performance and the variance of performance of funds in the US market in this post. I hope that it was informative to you as it was tough trying to sort through and make sense of all these data. I realised that this post is limited as I only looked at the US market (Efficient) and hence, there is a need to look at whether these scenarios are applicable to less-efficient market. I will be doing a similar thing to the global, international market (part 3) and emerging markets (part 4).
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