Twice a year, the S&P Dow Jones Indices publishes the SPIVA Scorecard (S&P Indices Versus Active), which compares the performance of actively managed mutual funds to their benchmark indices across various regions and asset classes. Their most recent scorecard shows that a majority of actively managed domestic equity funds underperformed their benchmarks in 2024.
In 2024, the S&P 500 index returned 25% (that’s total return, including reinvestment of dividends). The S&P 500 Growth index returned 36%, thanks in part to the performance of a handful of mega-cap tech names, affectionately known as the Magnificent 7. Yet 92% of actively managed large-cap growth funds underperformed the S&P 500 Growth index. How could fund managers fail to beat their index in such a banner year for large growth? Well, to avoid being “closet indexers,” active fund managers must constitute and weight their funds differently from the benchmark. Those who underperformed likely underweighted the heavy hitters in the index in a bid to differentiate their strategies.
Other equity asset classes fared better, with 61% of large-cap value funds and 77% of small-cap growth funds outperforming their benchmarks. In addition, many fixed income funds benefited from active management, particularly in sectors such as municipals and emerging debt. Within fixed income, off-benchmark exposures are particularly impactful, as adjustments to duration and credit quality can be employed by an experienced manager to generate excess return.
These results point to the importance of knowing where within a portfolio to employ active management vs. passive management. Funds in asset classes where markets are less efficient, have lower liquidity and have higher information barriers tend to benefit from managers with better access to those markets and may be worth the fees they charge. Funds in asset classes where markets are highly efficient and liquid have a difficult time providing alpha above their management fee, making low-cost passive management the way to go.
These management style preferences are borne out by the data. Vanguard’s semiannual report on portfolio construction trends reflects a much stronger preference among advisors for active management within fixed income allocations, as well as small-cap growth and international equity, whereas large-cap blend leans overwhelmingly passive.
Time horizon data from the SPIVA scorecard also emphasizes the tenet that asset allocation decisions outweigh security selection decisions over the long term. While some domestic equity funds managed to outperform their benchmarks over one-and three-year time frames, over 90% of funds in all but two asset classes underperformed their benchmarks over 20-year time frames. If you adjust the metric from absolute return to risk-adjusted return, 100% of large-cap growth funds underperform the S&P 500 Growth index over a 20-year horizon.
In light of these findings, are we to cry foul and throw in the towel on all active management, and hew to a completely passive approach to portfolio construction? Not at all. At Modera, our strategy employs a skillful blend of active and passive investments that acknowledges where managers can add value and where slightly higher expense ratios might be warranted, while keeping overall portfolio fees low. We carefully titrate allocations and exposures to various market sectors in keeping with our investment philosophy and current outlook, and review and adjust these allocations on an ongoing basis. Most importantly, we recognize the importance of an evidence-based approach to a successful investment strategy.
Sources:
https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2024.pdf
https://advisors.vanguard.com/content/dam/fas/pdfs/AdvisorPortfolioConstruction_Midyear2025.pdf
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