2013: A year in SPIVA Perspective (Part I)

2013 was the blockbuster year for equity as the domestic equity markets posted double-digits returns.  In a year marked by record breaking gains, it is particularly important to measure the relative performance of active funds versus the indices as bull markets often present challenging conditions for active managers to overcome. The 2013 year-end SPIVA report findings confirm that while active managers may do very well on an absolute basis, the majority of them can end up underperforming on a relative basis, at times by narrow margins.

Looking at the large cap space, the S&P 500 returned 32.39% for the year while the median quartile breakpoint for the large cap core category is 31.92%.  This slim spread of 47 basis point difference in returns is reflected in the underperformance of large cap core funds against the benchmark by a narrow majority (57.74%).

Small cap space, however, tells a different story.  The S&P SmallCap 600 had its best year since the launch in 1994, posting 41.31%.  The first quartile breakpoint of 40.85% for small cap core active funds indicates that a quarter of the funds were able to outperform the benchmark on a relative basis, albeit by a narrow margin of 0.46%.

Mid cap space is the only category in which the active managers fared well against the benchmark in 2013.  The S&P MidCap 400 Index gained 33.5% for the year.  The median mid cap core manager posted 34.91%, highlighting that the majority of the active mid cap managers were able to beat the benchmark by a good margin.

Over a longer-term investment horizon, even an underperformance or outperformance by a small return margin in one year can translate into a meaningful difference as compounding kicks in.  When viewed over the five-year horizon, active managers across all market cap segments and style underperformed their respective benchmarks.

Exhibit 1:  The Percentage of U.S Equity Active Managers Outperformed by Benchmarks

Source:  S&P Dow Jones Indices, CRSP.  Data as of 12/31/2013.

Exhibit 2:  One and Five-Year Quartile Breakpoints of U.S Equity Funds

Source:  S&P Dow Jones Indices, CRSP.  Data as of 12/31/2013.

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