The mid-year version of the SPIVA report, which regularly analyses how active managers compare to the S&P 500 index, was released in September. As usual, it tells us that most of us, US equity managers, are useless. At Graphene Investments, transparency is one of our core values, so we wanted our clients to know.
What does SPIVA tell us?
You can find all the details on the S&P Dow Jones Indices website (https://www.spglobal.com/spdji/en/research-insights/spiva/) but, to keep it short, the key takes in our opinion are as follows:
– the percentage of US large-cap equity managers outperforming the S&P 500 index over the long-term (10-15 years) is hardly above 10%.
– the last time that percentage exceeded 50% over a calendar year was in 2009, when 52% of active managers outperformed. 2007 was an even greater year, when only 45% underperformed.
– the first half of 2022 showed a great improvement, since only 51% of managers lagged behind their benchmark, when that percentage was as high as 85% in 2021.
Do we agree?
Figures are figures and, yes, we can only agree with them. We even believe that they underestimate the issue, because we note that most of the years when managers did well (that is, a tight majority of them managed to beat the benchmark) are years when a sharp correction took place. It is thus likely that, for many of these “winners”, the outperformance came from their ability to hold cash instead of equities (as a reminder, Graphene Investments caters to professional investors, who select products with predictable exposures, and we therefore keep our funds fully invested at all times).
What do we conclude?
The first important thing is, for investors willing to invest in US equities because they expect the market to go down, many portfolio managers are suitable (but a psychiatrist may be more appropriate). On the contrary, investors are facing a big challenge if they are trying to play an expected bull market or if, like us, they focus on the long-term for lack of ability to reliably predict the short-term. Not only their choice is limited but, as we all know, past performance is not a reliable indication of future performance.
A logical reaction to all this could be to shift to indexing, ie give up any hope of doing well to be sure they won’t do wrong. If, however, an investor still feels like trying to be an outlier (on the positive side), we strongly believe that the key is in a deep analysis of managers’ decision-making process. We noted that many of those who perform decently over the years have a strong investment discipline, which protects them from the undesired effects of stress and emotions.
Unlike the “artists”, who may be lucky for some time but will sooner or later lose their “mojo”, disciplined managers are more predictable. They also make many mistakes, but at least, they don’t get emotional and thus don’t automatically add more problems on top of the first ones.
If you would like to know more about our investment process, please fell free to contact us.
HG – October 14, 2022