Over 90% of Fund Managers Are Underperforming Their Benchmarks

TL/DR; Summary

Results from this year’s SPIVA report have revealed that about 90% of all actively managed funds have underperformed their benchmarks over the past 20 years. For clients of active investment managers, the consequences of such chronic underperformance have the potential to total well over $1 million in lost growth. Portfolio management fees just add insult to injury. Studies such as this underscore the importance of hiring a financial advisor whose primary competence is comprehensive financial planning as opposed to one whose sole focus is portfolio management.

Introduction

Every year, Standard & Poor’s publishes the SPIVA (S&P Index versus Active) report exploring the success of professional fund managers in outperforming their respective benchmarks. The latest report was made available to the public on September 21, 2023. Its results paint a glim picture for clients of active investment managers.

In the charts below, you will see a list of different fund categories and their respective benchmarks. Along the row, you will see the failure rate – the percentage of funds that have underperformed their benchmark – of each category. For example, you might see a category in the first column called “All Large-Cap Funds”, indicating that the results of fund performance belonging to the Large-Cap funds category belong on that row. As you go across the row, you’ll encounter some numbers. One such, in this instance is 85.61%, found on the column titled “10-Year (%)”. This would indicate that 85.61% of All Large Cap Funds have underperformed their benchmark over the past 10 years.

There are multiple time periods examined, and we’ll look at the results for all the major asset classes: U.S Equity, International Equity, and Fixed Income (Bonds).

United States Equity Funds

Let’s begin with the most important asset class, which should almost always make up most of your portfolio: U.S Equity. These funds invest in companies based in the United States.

1. Over the past 20 years, 93% of all domestic equity funds have underperformed their benchmark. In as little as 5 years, the failure rate for US equity funds is as high as 89%.

2. The fund category with the highest failure rate has seen 98% of funds underperform over 20 years.

3. The fund category with the lowest failure rate (besides real estate) has seen 90% of funds underperform over 20 years.

International Equity

Next up, we have International Equity Funds. These funds invest in companies that are based outside of the United States.

1. The fund category with the highest failure rate has seen 92% of funds underperform over 20 years.

2. The fund category with the lowest failure rate has seen 79% of funds underperform over 20 years.

Fixed Income

Finally, let’s look at fixed income (bonds). These funds invest in the debt of companies, governments, or private markets and can be very complex. And while I believe that fixed income funds can serve a purpose under the right circumstances, their performance as a whole has been abysmal.

1. The fund category with the highest failure rate has seen 100% of funds underperform over 20 years.

2. The fund category with the lowest failure rate has seen 58% of funds underperform over 20 years.

The Upshot – Consequences of Chronic Underperformance

Clients suffer significantly from this persistent underperformance, especially when coupled with management fees. To illustrate, a $1,000,000 portfolio growing at 6% annually ends up nearly $1.5 million behind one growing at 8% over 20 years. And once a 1.00% management fee is accounted for, the former portfolio falls behind by more than $2 million behind after 20 years.

Studies such as the SPIVA report underscore the invaluable role of an advisor as a holistic financial planner. However, many advisors either charge additional fees for planning or skip it altogether! And all too often, when planning is offered, it is inadequate. A competent advisor should:

1. Offer guidance on your cash flow and budget.

2. Examine your tax return for planning opportunities.

3. Ensure your estate planning and account beneficiaries are in order.

4. Check that your insurance covers all assets adequately.

5. Advise on your employer benefits and equity compensation.

6. Collaborate with other financial experts in your circle.

7. Provide a comprehensive view of your financial health and future.

If your advisor isn’t ticking these boxes, then it’s time you found a new one!