Spiva scorecard should be challenged by active proponents

Indeed, the narrative in financial and social media recently has been unsurprisingly negative. Yet what will we hear from those who are most heinously indicted in this report? Not much, I suspect. There appears to be little appetite for active fund groups to advocate any collective discourse about the potential benefits they offer investors.

I’ve never really understood their reticence to roll up their sleeves. Perhaps it is diplomacy, the perception of collusion, or the fear of a bout of unfavourable markets. The result, however, is that active fund proponents are portrayed as mere creatures of faith, who in the face of ‘compelling’ evidence, waste their hard-earned fee budget on a discredited belief system.

The opportunity cost of passive investing should be a material consideration for all investorsJake Moelller

When you consider European fund flows for 2016, it is clear investors are voting with their feet. According to Thomson Reuters Lipper data, 45 per cent of net flows into mutual funds were into passive vehicles. 

For 2015 this was 19 per cent and for 2014 only 8 per cent.

Thus when Franklin Templeton or Fidelity announce – as they have – a move into the exchange-traded fund (ETF) market, it is potentially misconstrued as an ignominious retreat for active rather than the prudent business diversifier it simply is.

The opportunity cost of passive investing should be a material consideration for all investors. The best performing active fund over five years to the end of 2016 in the Lipper UK Equity classification outperformed the highest ranked broad-based tracker over the same period by more than 110 percentage points. That’s considerable outperformance sacrificed to save 50 basis points in costs.

Choosing that active fund was clearly a good move in retrospect, but how do you identify a winner in advance? Rudimentary evidence of persistency can be readily found. Nearly 70 per cent of UK Lipper Fund Award winners across three years from 2014 remained in the first or second quartile of their categories at the end of 2016. 

In the UK Equity sector, 62 per cent of funds that had first or second-quartile one-year performance at the end of 2011 were still there five years later.

Today, I am considerably more circumspect about the active/passive debate. I’ve seen this late-cycle rush into market-capitalised indices before and know that the tide will turn. Commensurately, I’ve learnt more about the benefits the passive industry provides all investors and commend its innovation. The passive industry itself is not responsible for the pejorative tone that often pervades the debate.

While I could tell you my long-term, active-only Isa is doing perfectly well, what are the musings of the proselytising ‘true believer’ worth? 

If active fund groups were more willing to provide substantive counterpoints to studies such as the Spiva scorecard, we would have a much more constructive, engaging and – for all investors – considerably more valuable narrative to relay.

Jake Moeller is head of UK and Ireland research at Thomson Reuters Lipper