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SPIVA Report Interesting but Misses Key Message for Investors

By Dan Hallett, CFA, CFP on November 6th, 2015

SPIVA Canada ScorecardS&P Dow Jones Indices (SPDJI) publishes two reports annually comparing the performance of actively managed mutual funds against common financial market benchmarks. The recently-published mid-year SPIVA Canada Scorecard doesn’t paint a flattering picture of Canadian mutual fund returns. Although our client portfolios don’t include the retail versions of funds that SPIVA evaluates, I usually read them to stay informed.

Here are some thoughts that often spring to mind when reading these always-interesting reports:

Free of Survivor Bias

SPIVA reports are useful because their mutual fund database includes all of those old funds that existed at one time but didn’t survive. Many products are launched and if they don’t attract enough investor dollars, they are often ‘killed’ via a termination (where money is returned to investors) or the more common practice of merging a struggling fund into a larger sister fund.

Since funds that don’t survive are often small because of poor performance, excluding them from the historical record makes mutual fund performance look better than if such funds’ past performance is preserved. This is known as ‘survivorship bias’. But there are ways to fine tune SPIVA to offer better insights to readers.

Investable Benchmarks

SPDJI could produce more meaningful comparisons by using investable versions of stock market indices such as exchange traded funds tracking each index. While the likes of iShares, Vanguard and other ETF providers are efficient at tracking indices, there is a cost to obtaining benchmark exposure. And the data is readily available so there isn’t a good reason not to do this.

Divide the Universe

We have distinct types of investors – i.e. do-it-yourselfers and advice-seekers – with funds catering to each. Rather than comparing all funds in a category as a single group, it would be make more sense to carve up each group by the type of investor targeted.

For instance, DIY investors would tend to focus on cheaper funds that don’t have higher fees to pay for advice (e.g. funds offered by Mawer, Beutel Goodman, Steadyhand and Leith Wheeler). This group would surely fare better than ‘load funds’ with higher fees that offer commissions to dealers and brokers – which dominate the fund universe.

Active Management Is Skilled but…

The SPIVA reports don’t touch on an important point. As I touched on in a recent blog post, active management performance generally outperforms benchmarks before deducting fees. SPIVA report data show that this skill is largely absorbed by fees charged to retail investors.

So the more meaningful message is that active management skill exists but that investors must keep an eye on costs because there is a limit to what investors should pay for active management.

Control the Controllable

The message I see in the SPIVA reports – but isn’t in print – is really that successful investing results from taking control over the factors that we can to tilt the odds in your favour as much as possible.

This can be achieved by:

  • translating qualitative descriptions of broad objectives (e.g. I want a comfortable retirement while I’m young enough to enjoy it) into quantifiable goals and time frames (e.g., I need to accumulate $750k by age 62);
  • allocating investment assets to stocks, bonds, cash and other assets to match – as closely as possible – future goals (which often take the form of some future spending plan);
  • making smart decisions on where to hold certain investments (i.e. asset location);
  • obtaining investment exposure with a relatively simple portfolio structure (i.e. get broader exposure rather than buying small slices of financial markets);
  • rebalancing periodically (but not too often) when your overall mix deviates significantly from your target;
  • paying attention to fees when choosing products to obtain desired investment exposure; and
  • tracking your progress so that you know if you are on track to achieve your goals.

>> HighView Financial Group is an investment counselling firm for affluent families and foundations. We build portfolios based on each client’s unique goals and tolerance for risk. Schedule a complimentary discovery session to see if we’re the right investment stewardship counsellors for you.

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