Indexology^® Blog

The S&P Indices Versus Active (SPIVA^®) Scorecard,¹ published semiannually, measures the performance of actively managed funds against their corresponding benchmarks. The latest SPIVA India report provides a number of interesting insights about the performance of active versus passive across active fund categories.

1. Long-Term Outperformance of Active Funds Was Difficult

Indian bond funds had a tough time throughout the past decade, with most active bond managers underperforming their respective benchmarks over 1-, 3-, 5- and 10-year time horizons. Equity funds fared slightly better, with almost three-quarters of Indian ELSS active managers outperforming their benchmark in the past year and just over half of Indian Equity Mid-/Small-Cap managers outperforming over a three-year time horizon. Over a holding period of 5 or 10 years, however, most actively managed equity and bond funds underperformed, while a full 100% of Indian Composite Bond funds underperformed the S&P BSE India Government Bond Index over the past 10 years.

2. Government Bond Funds Have Struggled to Survive, While ELSS Funds Have Proven Long(er)-Lasting

The survivorship rates of Indian funds deteriorated over time across all categories, but the rate at which funds went extinct varied greatly across categories. While Indian ELSS funds have proven resilient, with over four-fifths surviving after 10 years, Indian Government Bond funds had the lowest survival rate, with 60% closing up after a decade.

3. There Was a Wide Dispersion in Active Fund Performance, Especially in the Mid-/Small-Cap Category

As we previously highlighted, Indian Mid-/Small-Cap managers fared better in the long run than active fund managers in other categories. While one may argue that long-term “alpha” exists in the mid-/small-cap space, identifying outperforming managers in advance can be difficult. The difference between a “good” and a “bad” choice is material. Highlighting the significant fund selection risk that investors face in this category, the interquartile range (which is the spread between the first and third quartile breakpoints of active funds in a given category) was a substantial 19% for Indian Mid-/Small-Cap funds in 2021, and over 4% annualized over the past decade.

¹ SPIVA Scorecards: An Overview. https://www.spglobal.com/spdji/en/education/article/spiva-scorecards-an-overview

The S&P 500^® lost 4.6% in the first quarter of 2022, with the market shaken by high inflation, the new variant of COVID-19 and geopolitical tensions in Europe. The S&P Risk Parity Indices, designed to offer diversified risk exposure across asset classes, stood the test and outperformed equities, as well as other active and passive risk parity benchmarks.

The S&P Risk Parity Index – 10% Target Volatility led the pack, with a quarterly return of -0.66%, followed by the S&P Risk Parity 2.0 Index – 10% Target Volatility (-2.77%). Both S&P Risk Parity Indices outperformed the HFR Risk Parity Index (-4.93%), which measures the weighted average return of risk parity active funds, and the Wilshire Risk Parity Index (-4.49%).

S&P Dow Jones Indices has two variations of risk parity index series, with several methodological differences between the two. The S&P Risk Parity Index Series, launched in 2018,¹ was the first transparent, rules-based, tradable index series in the risk parity marketplace. Then in 2021, we launched the S&P Risk Parity 2.0 Indices, which are designed to offer a hedge against inflation risk for fixed income securities through a distinct TIPS allocation, while the S&P Risk Parity Indices tend to allocate more to commodities. In the past quarter, rising commodity prices helped the S&P Risk Parity Indices’ performance relative to S&P Risk Parity 2.0 Indices. For a complete comparison of these two index methodologies, please refer to my previous blog.

Risk factors such as inflation, geopolitical tensions, COVID-19 and rising rates will likely continue to be top of mind for market participants in the coming months. The S&P Risk Parity Index Series may help diversify and reduce risk exposure in the current market environment.

¹ The S&P Risk Parity Index Series were relaunched in April 2020 to align the roll schedule of underlying securities with existing S&P DJI indices.

In a recent public consultation, evolving investor sentiment and the changing needs of the ESG landscape were reflected through S&P DJI stakeholders’ feedback on the S&P ESG Indices. The results were published April 1, 2022.¹ So, what are the changes?

• Quarterly eligibility checks instead of annual to incorporate the latest available information on a more timely basis and to avoid including companies that violate eligibility criteria for a longer period
• Additionally, an expanded and revised list of product involvement exclusions, including oil sands, small arms and military contracting exclusions
• As well as a switch of United Nations Global Compact (UNGC) data provider from Arabesque to Sustainalytics.

EXCLUSIONS BASED ON BUSINESS ACTIVITIES

The adoption of negative screens has increasingly come into focus for many ESG strategies. This shift in preference was reflected in the additional exclusions covering:

• Small Arms: Companies with any involvement in the manufacture or sale of small arms. Companies whose revenues from the retail or distribution of small arms are above or equal to 5%. Companies with significant ownership (above or equal to 25%) of companies that manufacture or sell small arms.
• Military Contracting: Companies that manufacture military weapon systems or integral, tailor-made components of these weapons, or that provide tailor-made products or services that support military weapons with a revenue threshold greater than or equal to 10%.
• Controversial Weapons: Companies with any revenue coming from providing components or services for the core weapon system, which are either not considered tailor-made or not essential to the lethal use of the weapon. Companies with significant ownership (above or equal to 25%) of the companies described above.
• Oil Sands: Companies with revenue greater than or equal to 5% coming from oils sands extraction.

The consultation results also reflected the need for stricter rules around companies’ involvement in activities such as tobacco, which resulted in the lowering of the business involvement threshold from 10% to 5%. Tobacco was also one of the categories in which significant ownership exclusions will no longer be applied, so as to not unfairly penalize certain companies.

For companies involved in tobacco, thermal coal, oil sands, controversial weapons, small arms or military contracting, the consultation results have further defined certain maximum revenue thresholds. If a company generates revenue exceeding these thresholds, it will be excluded at the quarterly index eligibility review. Companies with business practices out of alignment with the UNGC will also be excluded at the quarterly index eligibility review.

Please see the following link for more information on the impact disclosed in the public consultation.

EXCLUSIONS BASED ON THE UNITED NATIONS GLOBAL COMPACT

S&P DJI will change the provider of UNGC data from Arabesque to Sustainalytics, and will exclude companies deemed to be non-compliant. Sustainalytics’ Global Standards Screening assesses companies’ impact and the extent to which a company causes, contributes or is linked to violations of international norms and standards such as the UNGC principles.

S&P DJI maintains its ongoing commitment to keep live ESG index methodologies relevant and match investor conviction. Methodology changes will be implemented in conjunction with the upcoming rebalancing.

¹ To view all announcements, please see here.

Anyone familiar with our SPIVA reports will realize that most active managers fail most of the time. In 21 years of SPIVA data, a majority of large-cap managers underperformed the S&P 500 18 times; the most recent of the three exceptions came in 2009. Even in that context, 2021 was a year of above-average difficulty, as 85% of large-cap active managers lagged the benchmark—their second-worst performance ever (exceeded only by 2014’s dismal record).

Even in a difficult year, SPIVA data can sometimes yield nuggets of optimism for active managers. In 2021, e.g., only 38% of large-cap value managers lagged the S&P 500 Value Index. Growth, up 32%, handily outperformed Value (up 25%), creating an opportunity for value managers to benefit from style drift, as they are sometimes wont to do. On the other hand, 99% of large-cap growth managers lagged the S&P 500 Growth Index—an unprecedented level of underperformance, and hardly explained by the absence of opportunities to drift.

We’ve often argued that the skewness of equity returns helps explain the persistent frustration of active managers—in most years, only a minority of stocks outperform the index, making stock selection more difficult than it would be with equal numbers of out- and under-performers. Growth managers in 2021 were doubly hurt by skewness: of the 230 constituents of the S&P 500 Growth Index, only 96 outperformed. It’s hard to be a successful stock picker when only 42% of your names outperform, and it’s even harder when the outperformers are concentrated at the upper end of the capitalization scale.

Exhibit 1 divides the constituents of the S&P 500 Growth Index into quintiles by capitalization, and then compares the weighted average performance of the stocks in each quintile.

Although not strictly monotonic, there’s a clear relationship: larger growth stocks outperformed smaller in 2021. In fact, only the two largest capitalization quintiles outperformed the S&P 500 Growth Index, and those two quintiles comprise only seven stocks. At the top, Apple and Microsoft were the most important contributors to the index’s return in 2021; their combined weight was 23%. Only a rare active manager is willing or able to overweight names that large. Overweighting the five stocks in the second capitalization quintile, with an average weight of 4.3%, might also be problematic. For most growth managers, professional caution combined with client diversification guidelines would have made overweighting stocks in the top two quintiles difficult if not impossible.

Viewed from this perspective, it’s not surprising that virtually all large-cap growth managers underperformed in 2021. A growth manager’s ability to outperform was contingent on overweighting the names that would have been hardest to overweight.

S&P Dow Jones Indices annually publishes an in-depth report that examines ETF usage within insurance general account portfolios, leveraging the Schedule D data from annual insurance company filings. Following a generally consistent upward trend, from 2019 to 2020, U.S. insurance companies increased their ETF AUM by 18% to USD 36.9 billion.¹ An early look at 2021 data suggests this upward trend will continue.

Nuances in the reporting process make it challenging to cover the entire insurance universe at the time of publication. When we analyzed the use of ETFs in insurance general accounts in May 2021, the data available for the insurance industry was mostly complete—with 98.6% of companies reporting.² As we begin the 2022 analysis, which examines 2021 data, the incomplete 2020 data now automatically captures late filings. As a result, when we publish the forthcoming report examining 2021 ETF usage, the 2020 data we cite as a point of comparison will be slightly different than what we reported last year. For transparency and completeness, we highlight those differences below.

Of note, P&C companies reported USD 1.8 billion in ETF investments.

We will publish the analysis of insurance ETF holdings, as of 2021 year-end, at the end of May. Subscribe to be notified when the report becomes available.

¹ As of May 2021, when the report was published.

² See Appendix 1.1 of “ETFs in Insurance General Accounts – 2021”