The conventional logic is that emerging markets are so rife with pricing inefficiencies (due to fewer analysts and active managers) that active management should be far superior to a passive approach. But this does not seem to be borne out in the data. Whilst the success of active managers varies country by country, the overall message is that passives perform just as well in the supposedly wildly inefficient dusty corners of the market than in everywhere else.
- Both S&P and Morningstar data shows that the majority of EM active managers have underperformed regardless of geography, with the one exception being Indian ELSS’.
- Vanguard and Lyxor data also shows over 75% of EM active funds underperforming their benchmarks.
Section 1 of this post focuses on 2 sources of data: the Morningstar Active/Passive Barometer and the SPIVA reports. Both reports are updated every 6 months, and are cited widely in the industry as being the “scorecard” for assessing the performance of active funds. Both studies are conducted independently using their own separate data sets.
Section 2 contains a selection of other recent relevant studies that also contribute to the active/passive performance debate. Despite not being updated as regularly as the Morningstar and SPIVA reports, their conclusions are equally worth reading.
The Morningstar Active/Passive Barometer and the SPIVA reports
This section summarises the performance of active funds in emerging markets over the last 5-15 years, relative to their passive benchmarks. Morningstar provides data covering the last 10 years, and SPIVA’s data covers the last 5/10/15 years, depending on the country. There is considerably more data in the underlying reports, which can be found here, here, and here.
- Whilst the time periods vary by country, the SPIVA data shows that active managers have outperformed in only 2 of 14 categories – Indian ELSS’ and Australian mid- and small- cap equities. When adjusted for risk, the Australian mid- and small- cap active equity outperformance disappears, with 53% of active funds underperforming on a risk-adjusted basis.
- Morningstar data comes to a similar conclusion, with between 57% and 93% of active funds underperforming their passive benchmark, depending on the country.
- Looking at survivorship, SPIVA data shows that roughly 50% of active funds in EM survived after 10 years. Morningstar data paints a similar picture, albeit with decreasing survivorship rates for those countries whose data stretches back the longest.
NB: S&P Dow Jones compares active funds’ performances against their S&P-assigned costless benchmark, based on the funds’ Lipper classifications. Morningstar compares active funds’ performances against a composite of actual passive funds – their “benchmark” reflects the actual, net-of-fees performance of passive funds.
NB: Survivorship is calculated by dividing the number of distinct funds that started and ended the period in question by the total number of funds that existed at the onset of the period in question (the beginning of the trailing one-, three-, five- and 10-year period)
Further evidence from other sources
Vanguard’s research paper, ‘The case for low cost index-fund investing’ shows on page 9 how between 60% and 90% of active funds underperformed their benchmarks over the last 15 years across all measured regions, with around 80% of emerging market equity funds underperforming:
Lyxor’s research paper, ‘Analysing active & passive performance: What 2017 results tell us about portfolio construction’ shows on page 25 that between 11% and 50% of active equity funds outperformed their benchmark over the last 10 years – with 24% of emerging market large cap funds outperforming: