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Standard & Poor's Indices Versus Active Funds Scorecard …
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Created: Tue Aug 5 09:17:34 2008
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Standard & Poor's Indices Versus Active Funds Scorecard
Aug 5, 2008
Index Versus Active Funds Scorecard For
Canadian Funds
Standard & Poor's Indices Versus Active Funds
Bear Market Report (Aug 2000 Dec 2002)
Analytical Contacts
The Standard & Poor's Indices Versus Active Funds (SPIVA) Scorecard
SPIVA Canada Scorecard compares performance of actively managed Canadian mutual funds
Jasmit Bhandal
(416) 507 3203
(corrected for survivorship bias) with performance of relevant benchmark
jasmit_bhandal@sandp.com indices.
This special edition of SPIVA follows the Canadian market from a peak
SPIVA Methodology
Srikant Dash
in August 2000 through to the trough in December 2002 to analyze the
(212) 438 3012 effects of a bear market on active versus passive performance.
srikant_dash@sandp.com
Domestic Equities:
Many people believe that actively managed funds perform better than
Media Contacts indices during bear markets. However:
Dave Guarino · From the August 2000-December 2002 period, only 38.9% active
(212) 438 1471 Canadian Equity funds outperformed the S&P/TSX Capped
dave_guarino@sandp.com Composite Index.
· Canadian Equity funds exceeded the S&P/TSX Capped Composite
return on an equal and asset weighted basis; this reflects the strong
performance of only a few funds.
· The majority of Canadian equity funds still undperformed the index
reflecting the high degree of active risk.
· Only 34.4% of active Large Cap Equity funds were able to beat the
large cap S&P/TSX 60 Capped Index.
· The S&P/TSX SmallCap Index outperformed 70% of active Small
Cap Canadian Equity funds.
Foreign Equities:
During the same period, only 29% of active U.S. Equity funds were able
to outpace the S&P 500.
International Equity active funds present a similar picture with only 32%
beating the S&P/Citigroup EPAC PMI Index.
The S&P/Citigroup World PMI Index outperformed 54.1% of active
funds in the Global Equity fund space.
Standard & Poor's Indices Versus Active Funds Scorecard
Introduction
The Standard & Poor's Indices Versus Active Funds Canada (SPIVA Canada)
The SPIVA Scorecard Scorecard keeps tabs on the active-versus-index debate in Canada.
goes beyond simple
performance numbers SPIVA Canada shows performances of actively managed Canadian mutual funds
of each fund category compared with Standard & Poor's indices in their respective categories. Although
to report detailed many such reports are available, the SPIVA Canada scorecard is unique in many
apples-to-apples respects:
comparisons corrected
for survivorship bias.
· Survivorship bias correction: Many funds might be liquidated or merged during a
period of study. However, for someone making an investment decision at the
beginning of the period, these funds are part of the opportunity set. Unlike commonly
Equal weighted available comparison reports, SPIVA removes this survivorship bias.
returns are a measure
of average manager · Apples-to-apples comparison: Fund returns are often compared with a popular
performance. Asset benchmark regardless of its investment category. An appropriate comparison would be
weighted returns are a
to measure a fund's returns against the returns of a benchmark for that particular
measure of the
performance of the investment category. The SPIVA scorecard does this.
average invested
dollar. · Asset-weighted returns: Average returns for a fund group are often calculated using
only equal weighting, which results in the returns of a $10 billion fund affecting the
average in the same manner as the returns of a $10 million fund. Equal weighted
returns are a measure of average fund performance. Asset weighted returns are a
measure of the performance of the average invested dollar. The SPIVA scorecard
shows both equal- and asset-weighted averages.
This special edition of SPIVA examines the last Canadian bear market from the peak
in August 2000 through the December 2002 trough to analyze the effects of a bear
market on active versus passive performance.
SPIVA reports can be found online at www.spiva.standardandpoors.com.
SPIVA Canada does not make investment recommendations or offer comments on the
suitability of either index or active investing. The scorecard simply reports results according to
the SPIVA methodology briefly analyzes the numbers. Furthermore, we advise reading the
methodology at the end of the report to understand how we derive the numbers.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
The Bear Market at the turn of the Century
The August 2000-December 2002 period represented one of the longest and most severe bear
market for the Canadian equity market since 1929. As evidenced in Reports 3 and 4, the
S&P/TSX Composite Index lost more than a third of its value during the period. The S&P/TSX
60, which represents the large cap segment of the Canadian equity market, similarly
The S&P/TSX
SmallCap Index did experienced large declines during the period. The one component of the Canadian equity
not exhibit as large a markets that did not reflect such a severe downturn was the S&P/TSX SmallCap Index.
decline in the Aug Although its performance was slightly negative overall during the period, the index displayed
2000 Dec 2002 prolonged upswings, and was characterized by volatility and a number of reversals.
period.
Global markets experienced similar market upheavals. U.S., Asia and Europe all suffered steep
declines during this period. The 2000-2002 period represented the first three-year losing streak
for the S&P 500 Index since 1941. In addition, 2002 was the worst year for the broad U.S.
market since 1974, and all sectors finished in the red for the first time in at least two decades.
It is timely to reexamine this period in light of the current turbulence in equity markets
globally. Although peaks and troughs might not have been identical, the period chosen for the
report reflected steep declines in the markets examined.
In the Reports we compare Canadian Equity funds to both the S&P/TSX Capped Composite
Canadian Equity fund and the S&P/TSX Composite Index and the Canadian Large Cap funds to both the S&P/TSX
managers should be 60 and the S&P/TSX 60 Capped and there is a stark contrast in results between the indices. A
benchmarked to the much higher percentage of active funds were able to beat their benchmark when compared
S&P/TSX Capped with the `uncapped' index. This disparity in results can be explained by the "Nortel effect". At
Composite, which its peak (July 2000) Nortel represented 36.5% of the relative weight of the S&P/TSX
properly reflect the Composite Index (and an even larger percentage of the S&P/TSX 60). Nortel's steady decline
concentration limits in followed, and while the S&P/TSX Composite was fully exposed to this decline, funds had
place in their concentration limits (which generally prohibited asset managers from investing more than 10%
portfolios.
in any one stock) which effectively limited their exposure to this decline. As a result, the
correct benchmark to measure active fund performance within these categories was the
S&P/TSX Capped Composite or S&P/TSX 60 Capped Indices respectively, which place an
upper limit of 10% on the relative weight of any single index constituent.
The categories examined during the August 2000 December 2002 period are historical
Canadian Investment Funds Standard Committee (CIFSC) categories1 which were in place at
the time. The benchmark selected to compare against each category is defined in the glossary
in accordance with its form during the historical period.
Rethinking Bear Market Beliefs
Report 1 shows 38.9% of actively managed funds in the Canadian Equity category have
outperformed the S&P/TSX Capped Composite Index.
A bright spot for active funds was equal weighted and asset weighted returns over the period.
Active Canadian Equity funds exceeded the S&P/TSX Capped Composite returns. This would
imply that a few funds were able to beat the index by a large margin thereby pulling the
1
Additional information regarding this organization and their categories can be found at www.cifsc.com.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
average equal and asset weighted returns higher.2 However, given that investors are limited to
investing in a small number of funds, the outperformance figures better represent replicable
performance by the average retail investor.
The Canadian Large Cap category performance results are similar to those for Canadian
Equity. When comparing active Canadian Large Cap Equity funds versus the S&P/TSX 60
Capped Index , Report 1 indicates that only 34.4% outperformed the index. On an equal and
asset weighted basis, Canadian Large Cap funds underperformed the S&P/TSX 60 Capped
Index.
Most Canadian Small Cap Equity funds active funds were unable to beat the S&P/TSX
SmallCap Index during the period. The index outperformed 70% of active funds in this space.
On an equal and asset weighed basis, Canadian Small Cap Equity funds underperformed the
S&P/TSX SmallCap Index.
In Report 1, just 29% of U.S. equity funds3 in this category outperformed the S&P 500 Index
(in Canadian dollar terms) in the bear market period. On an equal weighed basis U.S. Equity
funds slightly underperformed the S&P 500, while on an asset weighted basis they marginally
outperformed the S&P 500.
International equity4 funds didn't fare any better. Report 1 shows that only 32% of funds in this
category outperformed the S&P/Citigroup EPAC Index (in Canadian dollars). On an equal and
asset weighed basis, International Equity funds underperformed the S&P/Citigroup EPAC
Index.
In contrast, active Global equity5 funds outperformance was more favorable. Report 1 showing
that 45.9% were able to outperform the S&P/Citigroup World PMI Index. In addition, on both
an asset weighed and equal weighted basis, Global Equity fund funds outperformed the
S&P/Citigroup World PMI Index.
Survivorship
A key advantage of the SPIVA report is its correction for survivorship bias, which can skew
results as funds merge or liquidate. For example, if there are 100 funds in the beginning of a
five-year period and 20 dropped out or merged by the end of the period, this would imply 80%
survivorship.
Report 2 indicates that survivorship in the period was 72.2%, 96.9%, and 74% for Canadian
Equity, Canadian Large Cap Equity, and Canadian Small Cap Equity categories, respectively.
The non-domestic categories of U.S. Equity, International Equity and Global Equity yielded
survivorship figures of 67.7%, 96%, and 90.2%, respectively.
The significant liquidation and merger activity in some categories makes it imperative that
survivorship bias correction be made in any fund performance calculation.
2 In addition, asset-weighted returns were higher than equal weighted, implying that funds with larger asset sizes did better than those with smaller
funds.
3
This category encompasses funds that can invest in U.S. equity markets with Canadian dollar returns. In addition to equity risk, these funds carry
currency risk.
4
This category encompasses funds that invest most of their assets in developed countries other than Canada and the U.S. In addition to equity
risk, these funds carry currency risk.
5
This category encompasses funds that can invest in securities domiciled anywhere across the globe. In addition to equity risk, these funds carry
currency risk.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
Appendix 1: SPIVA Methodology
Data
Standard & Poor's obtains a custom feed of monthly return data from Fundata Canada for all
equity mutual funds that have information in their database. The feed includes data on funds
that have merged or liquidated. Fundata applies the following filters to the file we receive:
All non-equity funds are excluded
All pooled funds, segregated funds or other specialized categories that do not qualify as
retail mutual funds are excluded
Multiple occurrences of the same funds' portfolio reporting in two or more currencies are
also excluded we simply take the Canadian dollar version
Only a single share class is included
The file has the following data fields on a monthly basis:
1. Fund name
2. Fund identifier
3. Month and year
4. Fund returns for the month, after management and other costs, and including distributions
5. Fund assets under management in that month
6. Fund categorization in that month
7. Management type, i.e., whether the fund is indexed or actively managed
We then limit our subset using the following filters:
We choose funds that are actively managed, excluding index funds.
We remove from the sample funds that do not have information on assets under
management for any month within the time period examined. These funds are relatively
few, and we compare their equal weighted returns to those of the funds with assets
reported in Report A1 to illustrate the impact of their exclusion. We remove these funds
because our report on asset-weighted returns cannot be computed without fund asset
information, and we wish to use a consistent data set across the four main reports on
active-versus-index performance included in SPIVA Canada.
Fund Categories
We chose funds that have, at any point in the August 2000-December 2002 period, been
classified in at least one of the following CIFSC6 categories:
1. Canadian Equity
2. Canadian Large Cap Equity
3. Canadian Small Cap Equity
4. U.S. Equity
5. International Equity
6. Global Equity
6
Refer to www.cifsc.com for additional information regarding this organization and their categories.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
Benchmarks
The benchmarks we choose are shown in the table. All the index returns are total returns (i.e.,
include dividend reinvestment) in Canadian dollars. There has been no deduction of index
returns to account for fund investment expenses. Active fund returns are after expenses, but
do not include front- or back-end loads or other commissions that investors might pay.
Fund Category Comparison Benchmark
Canadian Equity S&P/TSX Composite Index
S&P/TSX Capped Composite
Index7
Canadian Large Cap S&P/TSX 60 Index
Equity S&P/TSX 60 Capped Index
Canadian Small Cap S&P/TSX SmallCap Index
Equity
U.S. Equity S&P 500 Index
International Equity S&P/Citigroup EPAC PMI
Index
Global Equity S&P/Citigroup World PMI
Index
For additional information on any of the benchmark indices, please see the one-page glossary
at the end of this report, or visit our website at www.standardandpoors.com .
Reports
Report 1: Percent of Active Funds Outperforming Index
This report shows the percent of funds that have outperformed the comparison benchmark in
the August 2000-December 2002 period. We start with the funds in a category at the beginning
of the period. At the end of the period, we report what percent of funds have survived and
outperformed the index. We don't consider the fund's category at the end of the period, since
the category at the beginning of the period is of interest.
This report essentially shows what percentage of funds in the opportunity set at the beginning
of the period survived and beat the benchmark.
Most reports that purport to show the percent of active funds outperforming index work with
the funds in a category at the end of the period, and then compare their historical returns to the
benchmark. SPIVA corrects for this survivorship bias by starting with the funds at the
beginning of the period.
7
The main reports show a comparison with the S&P/TSX Capped Composite, since mutual funds are restricted from holding more than 10%
of their portfolio in a single stock. A capped index better represents an active manager's opportunity set in periods where the history includes
a concentration problem. In practical terms, both benchmarks would be equivalent where the history under consideration does not have a
greater than 10% single-stock concentration in the S&P/TSX Composite Index.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
Report 2: Survivorship
This report shows the count of funds that existed in a particular category at the beginning of
the August 2000-December 2002 period, and how many survived at the end of this period. The
fund's category at period-end is not considered, since the category at the beginning of the
holding period is of interest.
This report essentially shows what percentage of funds in the opportunity set at the beginning
of the period survived.
Report 3: Equal Weighted Fund Returns
This report shows the equal weighted average returns of funds in a particular category for the
August 2000-December 2002 period. For every month in the period, we take all existing funds
in a category and calculate the simple average return. We then compound the returns from all
months in the period. These returns are compared with those of the benchmark returns. The
funds used in the averaging process in one month might not be the same as the next, since
some funds would have merged or liquidated, new funds would have been formed, and some
might have had their categories changed.
This report essentially shows equal weighted performance of actively managed funds in a
category over the time period, with the level of granularity for determining the eligible
population in that category being monthly.
Most reports that purport to show average active fund performance work with the funds in a
category at the end of the period, and then take the average of their historical returns. SPIVA
presents a more accurate picture of active fund performance in a category by calculating the
average performance of the active funds within a category each month.
Report 4: Asset Weighted Fund Returns
This report shows the asset weighted average returns of funds in a particular category for the
August 2000-December 2002 period. For every month, we take all funds in a category and
calculate the average return by weighing each fund's return by its month-end assets. We then
compound the returns from all the months in the period. These returns are compared with those
of the benchmark returns. The funds used in the averaging process in one month might not be
the same as used the next, since some funds would have merged or liquidated, new funds
would have been formed, and some might have had their categories changed.
This report essentially shows asset weighted performance of actively managed funds in a
category over the time period, with the level of granularity for determining the eligible
population in that category being monthly.
Most fund reports do not show asset weighted returns. SPIVA presents an accurate picture of
asset weighted active fund performance in a category by calculating the asset weighted average
performance of the active funds within a category each month.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
Report 1: Percent of Active Funds Outperforming Index: Aug 2000 Dec 2002
Category Comparison Index
Canadian Equity S&P/TSX Composite Index Total Return 66.67
Canadian Equity S&P/TSX Capped Composite Index Total Return 38.89
Canadian Large Cap Equity S&P/TSX 60 Index Total Return 87.50
Canadian Large Cap Equity S&P/TSX 60 Capped Index Total Return 34.38
Canadian Small Cap Equity S&P/TSX SmallCap Index Total Return 30.00
U.S. Equity S&P 500 Total Return Index C$ 29.03
International Equity S&P/Citigroup EPAC PMI Index Total Return C$ 32.00
Global Equity S&P/Citigroup World PMI Index Total Return C$ 45.90
Source: Standard & Poor's, Fundata. All data ending Dec 31, 2002. CIFSC categorizations.
Note: There has been no deduction of fund expenses from index returns.
Standard & Poor's 8
Standard & Poor's Indices Versus Active Funds Scorecard
Report 2: Survivorship: Aug 2000 Dec 2002
Category Count at Beginning of Period Survivorship %
Canadian Equity 90 72.22
Canadian Large Cap Equity 32 96.88
Canadian Small Cap Equity 50 74.00
U.S. Equity 62 67.74
International Equity 25 96.00
Global Equity 61 90.16
Source: Standard & Poor's, Fundata. All data ending Dec 31, 2002. CIFSC categories.
Standard & Poor's 9
Standard & Poor's Indices Versus Active Funds Scorecard
Report 3: Equal Weighted Fund Returns: Aug 2000 Dec 2002
Fund Category or Index
Canadian Equity -14.13
S&P/TSX Composite Index Total Return -33.93
S&P/TSX Capped Composite Index Total Return -18.59
Cdn Large Cap Equity -19.64
S&P/TSX 60 Index Total Return -38.97
S&P/TSX 60 Capped Index Total Return -13.23
Cdn Small Cap Equity -10.48
S&P/TSX SmallCap Index Total Return -1.94
U.S. Equity -33.65
S&P 500 Total Return Index C$ -32.47
International Equity -35.36
S&P/Citigroup EPAC PMI Index Total Return C$ -33.19
Global Equity -31.64
S&P/Citigroup World PMI Index Total Return C$ -33.92
Source: Standard & Poor's, Fundata. All data ending December 31, 2002. CIFSC categories.
Note: There has been no deduction of fund expenses from index returns.
Standard & Poor's 10
Standard & Poor's Indices Versus Active Funds Scorecard
Report 4: Asset Weighted Fund Returns: Aug 2000 Dec 2002
Fund Category or Index
Canadian Equity -11.95
S&P/TSX Composite Index Total Return -33.93
S&P/TSX Capped Composite Index Total Return -18.59
Canadian Large Cap Equity -14.64
S&P/TSX 60 Index Total Return -38.97
S&P/TSX 60 Capped Index Total Return -13.23
Canadian Small Cap Equity -14.33
S&P/TSX SmallCap Index Total Return -1.94
U.S. Equity -32.20
S&P 500 Total Return Index C$ -32.47
International Equity -35.31
S&P/Citigroup EPAC PMI Index Total Return C$ -33.19
Global Equity -23.75
S&P/Citigroup World PMI Index Total Return C$ -33.92
Source: Standard & Poor's, Fundata. All data ending December 31, 2002. CIFSC categorizations.
Note: There has been no deduction of fund expenses from index returns.
Standard & Poor's 11
Standard & Poor's Indices Versus Active Funds Scorecard
Report A1: Funds Excluded from Sample Due to Missing Asset Data: Aug 2000 Dec 2002
Equal Weighted Returns
Category In Sample?
Canadian Equity Included -14.13
Excluded -14.90
Canadian Large Cap Equity Included -19.64
Excluded -37.75
Canadian Small Cap Equity Included -10.48
Excluded -8.98
U.S. Equity Included -33.65
Excluded -26.99
International Equity Included -35.36
Excluded -40.04
Global Equity Included -31.64
Excluded -32.32
Source: Standard & Poor's, Fundata. All data ending December 31, 2002. CIFSC categorizations.
Note: There has been no deduction of fund expenses from index returns.
Standard & Poor's 12
Standard & Poor's Indices Versus Active Funds Scorecard
Report A1 (continued): Count of Funds at Beginning of Period
Category In Sample? Last Quarter
Canadian Equity Included 90
Excluded 27
Canadian Large Cap Equity Included 32
Excluded 3
Canadian Small Cap Equity Included 50
Excluded 8
U.S. Equity Included 62
Excluded 9
International Equity Included 25
Excluded 2
Global Equity Included 61
Excluded 20
Source: Standard & Poor's, Fundata. All data ending December 31, 2002.
CIFSC categorizations.
Note: There has been no deduction of fund expenses from index returns.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
Glossary
S&P 500 Index
Widely regarded as the best single gauge of the U.S equities market, this index
includes a representative sample of 500 leading companies in leading industries of the
U.S. economy and provides over 80% market coverage of the U.S. equities market.
S&P/TSX 60 Index
This index is designed to measure the performance of large cap Canadian securities
with a view to matching the sector weights of the S&P/TSX Composite.
S&P/TSX Capped Composite Index
This includes all the constituents of the S&P/TSX Composite Index with relative
weighting of each constituent capped at 10%.
S&P/TSX 60 Capped Index
This includes all the constituents of the S&P/TSX 60 Index with relative weighting of
each constituent capped at 10%.
S&P/Citigroup EPAC PMI Index
This index is a float-weighted, rules based benchmark that captures universe of
securities in the developed markets less North America. The Primary Market Index
(PMI), covering world equity markets, constitutes the top 80% of the available market
cap of the global S&P/Citigroup EPAC BMI Index.
S&P/Citigroup World PMI Index
This index is a float-weighted, rules based benchmark that captures securities in the
developed markets. The Primary Market Index (PMI), covering world equity markets,
constitutes the top 80% of the available market cap of the global S&P/Citigroup World
BMI Index.
S&P/TSX Composite Index
This is the headline index and the principal broad market measure for Canadian Equity
markets. Previously this index was referred to as the TSE 300.
S&P/TSX SmallCap Index8
This index includes those securities in the S&P/TSX Composite which are not
members of the S&P/TSX 60 or S&P/TSX MidCap Indices.
8
This is an historical definition applicable to the 2000 to 20002 period under examination. This index was
redeveloped on March 2007. The current S&P/TSX SmallCap Index is calculated as a separate index from the
S&P/TSX Composite Index.
Standard & Poor's
Standard & Poor's Indices Versus Active Funds Scorecard
For more information, please go to www.spiva.standardandpoors.com
This report is published by Standard & Poor's, 55 Water Street, New York NY 10041.Copyright © 2008
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