A couple of weeks ago, the latest SPIVA data was released on the performance of institutional fund managers in the US. The findings were horrifying. The data reveals that over 70% of equity funds underperformed their respective benchmarks over the 10-year period ending Dec. 31, 2023. After accounting for fees, the rate of underperformance rose to over 80%! Ouch!

There were a few nuances in the data: small and mid-cap managers had significantly lower underperformance rates compared to large-cap managers. Interestingly, fixed income managers also had lower underperformance rates before fees, but the impact of fees was much higher post-deduction. You can see the detailed charts below and click here to read the full SPIVA paper.

I’d love to tell you that this data is only relevant to US investment managers, but unfortunately, SPIVA conducts similar surveys worldwide, including in Australia, and the results are largely the same. Over a 10-year period, most active managers underperform their benchmarks, especially after fees. As I said – horrifying!

What does it all mean?

1. Should we ditch all active managers and index everything? No, I don’t think so. I believe that while indexing does have a place in high-net-worth portfolios (read more about my views here) but I also believe that active managers have a role to play in your portfolios. This data suggests that you need to be selective about who you invest with. Having a deep understanding of the what, who, and why of your investments is crucial. The truth of funds management is, and most people aren’t going to like me saying this, is that there is an X factor involved – pure talent. Some people have it, many don’t. I’ve seen highly qualified individuals, literal rocket scientists and brain surgeons, fail to produce investment performance. I believe that investing is both an art and a science, and there are talented people who can generate great returns. However, as this data suggests, they are hard to find, especially in the large cap space. The data suggests there might be more room for small cap and fixed interest managers to add value over time. To find the right manager in any sector you need to be disciplined and detailed. As the saying goes, you need to sort the wheat from the chaff, and in investment management, there’s a lot of chaff.
2. Having a formal review process matters: There’s a myth in my industry that you should “set and forget” your investments. I disagree. Don’t get me wrong, if something is performing well all of the time, I start to worry that it is a Ponzi scheme! Almost all investment managers have periods of underperformance. It is part of investing. Not all investment styles work all the time, which is why you have a diversified portfolio. All my clients undergo a quarterly review process where we assess both outperformers and underperformers. We maintain a “watch list” for those not performing as expected. We seek to understand the manager’s situation, but if they remain on the watch list for too long, we have a formal process to reconsider our investment.
3. The fees you pay matter: I’ve always been obsessed with fee structures and their impact on returns, and the SPIVA data supports this obsession. Fees matter and as the data above shows can often turn outperformance into underperformance. Interestingly fees made a more significant difference across fixed income categories. Fixed income has a lower potential return than an equity style investment. This proves where the potential size of the returns are smaller you need to be even more focused on the fees you are paying.

Most managers are polished, with great stories and marketing. Your job (and definitely mine) is to dig into the details and find the truth. Performance is key. The SPIVA data shows the importance of being discerning about your investments. You need to be clear about what you’re investing in, who you’re investing with, the costs involved, and have a formal review process to ensure your investments meet expectations over time. Mistakes happen, but a formal review process helps catch them and prevents you from staying in poor-performing investments for too long. Life’s short—invest well!

If you’d like to read more of my views on performance and fees click here.

Kind regards,

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

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