the bogle issue - IndexUniverse.com

Figure 6a
Figure 7a
6%
5%
4%
3%
2%
1%
0%
Mid- And Small-Cap Funds Vs. Russell Benchmarks
5.32%
Active MidCap
Funds
5.30%
4.26%
Russell MidCap Active SmallCap Russell 2000
Funds
Sources: U.S. SPIVA Scorecards dated August 24, 2011; Bloomberg
Figure 6b
Mid- And Small-Cap Funds Vs. S&P Benchmarks
4.08%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Fund Death Rate Over 3 Years
Sources: U.S. SPIVA Scorecards dated August 24, 2011; Bloomberg
Figure 7b
16%
18%
17%
10%
Large Cap Mid Cap Small Cap General
Muni. Debt
17% 17%
California
Muni. Debt
New York
Muni. Debt
% Of Large-Cap Funds Beating Benchmarks Over 5 Years
7%
6%
5%
4%
5.32%
6.59%
4.26%
4.61%
90%
80%
70%
60%
50%
51.9%
64.7%
81.3%
3%
2%
1%
40%
30%
20%
10%
19.6%
30.0%
37.5%
0%
Active Mid-Cap
Funds
S&P MidCap 400 Active Small-Cap S&P SmallCap 600
Funds
0%
LC Growth Funds LC Blend Funds
■ All Funds ■ Surviving Funds
LC Value Funds
Sources: U.S. SPIVA Scorecards dated August 24, 2011; Bloomberg
6. Benchmark Choice Matters In The Active-
Passive Debate
Beyond the world of indexing and index-linked products,
benchmark choice is not exactly at the forefront of
most investors’ minds. That’s unfortunate, because no two
benchmarks are alike, and the outcome of an investment
decision process that employs benchmark returns as an
input can be dramatically different depending upon the
benchmark choice. For example, Figures 6a and 6b show
that one can get very different answers with regard to the
question of whether indexing works for midcaps and smallcaps
simply based on whether one is using S&P or Russell
benchmarks. There is no guarantee one benchmark will
perform better than another over any time horizon, but it is
fairly certain that indexes from different providers that measure
the same asset class can exhibit very different returns.
7. Survivorship Bias Is Too Big To Ignore
Mergers and liquidations are a fact of life for the fund
management industry. But the scale of fund deaths is
stunning—over three years, it is not surprising to see
SPIVA scorecards showing 10 to 20 percent of funds disappearing.
Over five years, the rate occasionally jumps
Sources: U.S. SPIVA Scorecards dated August 24, 2011; Bloomberg
Figure 7c
80%
70%
60%
50%
40%
30%
20%
10%
0%
% Of Small-Cap Funds Beating Benchmarks Over 5 Years
25.4%
35.1%
SC Growth Funds
40.6%
48.7%
SC Blend Funds
■ All Funds ■ Surviving Funds
Sources: U.S. SPIVA Scorecards dated August 24, 2011; Bloomberg
52.3%
67.2%
SC Value Funds
to a quarter or more. At the beginning of the investment
horizon, these funds that subsequently die are part of the
investment opportunity set. Not including those in the
opportunity set may paint a far more favorable picture
continued on page 62
www.journalofindexes.com March / April 2012 35