SPIVA® U.S. Year-End 2023 (2024)

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SUMMARY

After a dismal 2022, the market recovered with a vengeance in 2023 and the S&P 500^® gained an impressive 26%. Optimism that the U.S. Federal Reserve would be able to engineer a soft landing accompanied a broadening of the rally to the S&PMidCap 400^® and the S&P SmallCap 600^®, which both climbed 16%. Meanwhile, despite persistent inflation concerns and a rough start to the year for regional banks, U.S. fixed income markets also gained in 2023—albeit less materially and with a few more bumps along the way.

Over the full year, a majority of actively managed funds underperformed their assigned benchmarks in most of our reported fund categories. In our largest and most closely watched comparison, 60% of all active large-cap U.S. equity funds underperformed the S&P 500. This figure was better than might have been expected given the dominance of the U.S. equity market’s largest stocks, placing 2023’s underperformance rate close to, but just below, the 64% average annual rate reported over the 23-year history of our SPIVA Scorecards.

Perhaps aided by their ability to opportunistically tilt toward outperforming large caps, the results were generally better for funds in smaller-capitalization U.S. equity categories: just 50% of All Mid-Cap funds lagged the S&P MidCap 400 and only 48% of All Small-Cap funds underperformed the S&P SmallCap 600. Small-Cap Value was a particular bright spot, with only 37% of funds underperforming the S&P SmallCap 600 Value.

Turning to international equity categories, nearly three-quarters (74%) of funds in the Global category underperformed, but at least in relative terms, International Small-Cap Funds continued to offer more fertile grounds for actively managed funds: just 54% underperformed.

Fixed income results, with an underperformance rate of 59% across all fund categories, were more mixed, with 9 out of our 17 reported categories posting majority underperformance. At one extreme, 98% of funds in the General Investment-Grade category and 80% of High Yield funds underperformed. Municipal and emerging debt were among the categories that saw majority outperformance.

Across all categories, underperformance rates typically rose as time horizons lengthened. Exhibit 2 illustrates the point. At the one-year horizon, 6 of 22 equity categories and 8 of 17 fixed income categories saw majority outperformance, falling to just 1 equity category and 4 fixed income categories over five years. At the 15-year horizon in both asset classes, there were no categories in which the majority of active managers outperformed.

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The SPIVA Australia Scorecard measures the performance of actively managed funds relative to benchmarks over various time horizons, covering equity, real estate and bond funds, and providing statistics on outperformance rates, survivorship rates and fund performance dispersion. In this year-end 2023 edition, domestic equity funds in New Zealand are included for the first time.

2023 Highlights

It was among the best of times and the worst of times for actively managed funds. In the Australian Equity General category, more than three-quarters of active managers failed to keep up with the S&P/ASX 200, and a similar story was seen in the International Equity General category. Meanwhile, active bond managers had an exceptional year, with almost three-quarters of Australian Bonds funds beating the S&P/ASX Australian Fixed Interest 0+ Index. Exhibit 1 summarizes the results across all our reported categories.

• Australian Equity General Funds: The S&P/ASX 200 ended the year up 12.4%, and Australian Equity General funds struggled to keep up; the one-year underperformance rate of 77% was the second highest in our records (see Exhibit 8). Longer term, underperformance rates were even higher, rising to 85% of funds underperforming the benchmark over 15 years.
• Australian Equity Mid- and Small-Cap Funds: The S&P/ASX Mid-Small gained 7.8% in 2023 and a firm majority (64%) of actively managed Australian Equity Mid- and Small-Cap funds managed to beat it. Funds in the category gained 10.8% and 13.0% on an equal- and asset-weighted average basis, respectively. More such years will be required to change the longer-term statistics, however, with 77% of funds currently lagging over 10 years.
• International Equity General Funds: International equity funds posted average 2023 returns of 20.3% and 19.2% on an equal- and asset-weighted basis, respectively, with 81% of funds trailing the S&P Developed Ex-Australia LargeMidCap's total return of 24.1%. Over the 10- and 15-year horizons, around 94% of funds underperformed.
• Australian Bonds Funds: Active managers in the Australian Bonds category posted their lowest one-year underperformance rate since the 2015 launch of the S&P/ASX Australian Fixed Interest 0+ Index, with just 26% of funds lagging the index. The longer-term record was also better relative to other categories, with 56% and 46% underperforming over the three- and five-year periods, respectively.
• Australian Equity A-REIT Funds: After a challenging start to the year, active managers in the Australian Equity A-REIT category improved their underperformance rate to 69%over the full year. Over the 15-year period, 80% of active funds underperformed.
• New Zealand Domestic Equity Funds: Over the one-year period, actively managed funds in the New Zealand Domestic Equity category gained 4.8% and 5.1% on an equal- and asset-weighted basis, compared to a 3.5% gross return with imputation for the S&P/NZX 50 Index. Within this category, 54% of active funds outperformed over oneyear, but just 23% outperformed over the 15-year period.
• Fund Survivorship: Liquidation rates for most active fund categories were moderate in 2023. International Equity General Funds recorded the highest liquidation rate at 7.7%. In contrast, none of the New Zealand Domestic Equity funds were liquidated, while only 1.3% of Australian Equity Mid- and Small-Cap funds failed to survive. The attrition rate increased over longer time horizons, with 57% of funds across all categories merged or liquidated over the 15-year period.

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Summary

The semiannual SPIVA Europe Scorecard was first published in 2014 and reports on the performance of actively managed funds domiciled across Europe. In this report, we complement the traditional scorecard with a comparison of sustainability-focused actively managed funds and indices. In addition to performance, we also assess changes in the sustainability profile relative to the broad equity benchmarks and tracking error characteristics.

In the six-month period ending on Sept. 29, 2023, more than 80% of active sustainability funds underperformed their assigned benchmarks in most categories. Over the three-year horizon, 91% of active funds in the Core ESG – U.S. Equity Large Cap category underperformed the S&P 500® ESG Index (see Exhibit 1).

Introduction

Asset owners around the globe have been increasing their allocations to investment strategies that incorporate sustainability considerations. This increase, in turn, reflects the growing importance of sustainability factors for asset managers in their investment decisions. In the meantime, the regulatory landscape has been maturing and becoming more far-reaching, while a growing number of asset owners and asset managers have been voluntarily committing to sustainable investing practices.

Sustainability-focused active funds and indices typically have investment objectives aimed at improving their sustainability profile relative to their underlying broad equity benchmark. For example, if one of the investment objectives is to reduce carbon emissions, an active fund or index may tilt toward less carbon-intensive companies or even exclude some of the largest emitters. This positioning, in turn, results in tracking error relative to the benchmark. The trade-off between achieving an improved sustainability profile and maintaining the desired broad equity benchmark-like performance characteristics requires a delicate balance.

In terms of sustainability profile, this report examines two metrics:

• Index-weighted Carbon Intensity; and
• Temperature Alignment, which is a forward-looking metric assessing a company's future projected decarbonization trajectory. Together, these two metrics measure carbon reductions realized at a given point in time, as well as assess alignment with climate scenarios from a forward-looking perspective.

There are different approaches to measuring and analyzing a fund’s sustainability performance. The advantage of these two metrics is their relative robustness and quantifiable nature.

The purpose of this report is to provide asset owners and asset managers with research insights to help them prioritize and make decisions regarding sustainable investing strategies by finding the "sweet spot" between their tracking error tolerance and sustainability objectives in the most cost-efficient way.

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S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active (SPIVA) U.S. Scorecard in 2002.

The SPIVA South Africa Scorecard measures the performance of actively managed South African equity, global equity and fixed income funds denominated in South African rand (ZAR) against their respective benchmark indices over various time horizons.

Mid-Year 2023 Highlights

The first half of 2023 proved challenging for active equity managers in South Africa, although fixed income managers fared better. At either extreme, 89% of South Africa Global Equity managers underperformed the S&P Global 1200, while only 19% of Diversified/Aggregate Bond managers trailed the broad sovereign bond index (see Exhibit 1 and Report 1). Underperformance rates generally increased with measurement horizons, with a cross-category average of 70% of active funds underperforming over the past 10 years.

• South Africa Equity Funds: The S&P South Africa 50 finished H1 2023 up 5.1%, while South Africa Equity funds posted gains of 3.7% and 4.0% on equal- and asset-weighted bases, respectively, and 75% of funds underperformed the benchmark. Underperformance rates rose to 77%, 88% and 96% over the 3-, 5- and 10-year horizons, respectively. Compared with the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index, which rose 3.3% in H1 2023, 55% of South Africa Equity funds underperformed. Over the 3-, 5- and 10-year horizons, underperformance rates reached 54%, 50% and 69%, respectively.
• Global Equity Funds: The S&P Global 1200 gained 27.9% during H1 2023, and Global Equity funds gained 22.9% and 24.2% on equal- and asset-weighted bases, respectively. Over this period, 89% of funds in the category underperformed the benchmark. Over the 3-, 5- and 10-year periods, 89%, 100% and 100% of funds underperformed, respectively.
• Short-Term Bond Funds: As the STeFI Composite increased 3.7% in H1 2023, 26% of Short-Term Bond funds finished the period underperforming the index. Over the first half of 2023, bond funds in this category gained 3.9% and 4.1% on equal- and asset-weighted bases, respectively. Over the 3-, 5- and 10-year periods, 15%, 20% and 31% of funds underperformed, respectively. On a risk-adjusted basis, however, underperformance rates rose to 79%, 82% and 98% over the 3-, 5- and 10-year periods, respectively.

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Summary

“Should five per cent appear too small,

be thankful I don't take it all.”

“Taxman”, George Harrison

Since 2002, S&P Dow Jones Indices has evaluated index versus active fund performance through the SPIVA Scorecards. In this report, we revisit the broad U.S. domestic equity categories with an additional layer of analysis, comparing the putative after-tax performance of indices and active funds.

The average cumulative effects of taxes on investor returns are summarized in Exhibit 1 for the Large-Cap Core fund category. After tax, the median active fund trailed the S&P 500^® over every time horizon, by up to 3.5% annually (see Exhibit 1).

Introduction

A passive, capitalization-weighted approach to equities can require a counterintuitive degree of patience: stocks are never excluded the S&P 500 just for being too expensive. Instead, stocks with market-beating price increases are—all else remaining equal—provided with increasing weights. This fact is often criticized by proponents of a more active approach, who point to their ability to sell overpriced securities when profit-taking is more prudent than passivity. However, 20 years of S&P Dow Jones Indices’ SPIVA Scorecards collectively attest that the ability to consistently identify the right time to sell in order to “beat the market” is relatively rare.

But the difficulty of successful market timing and stock picking are not the only factors in favor of the patience encoded in indices like the S&P 500. Further grounds may be provided by considering that even the sale of long-held profitable positions can invite unwelcome tax consequences, while the gains from short-term trading activity are normally diminished by a yet higher tax rate. Accordingly, it might seem reasonable to conjecture that outperforming broad, capitalization-weighted indices might prove even harder after accounting for the tax consequences of active trading.

The existence of a common standard for reporting after-tax returns in U.S. mutual funds provides a way to test this conjecture and the motivation for this report, which extends the traditional SPIVA Scorecards to include after-tax comparisons for selected categories. Exhibit 2 highlights selected statistics from the later detail, confirming the relatively high long-term after-tax underperformance rates for actively managed U.S. domestic equity mutual funds.