INVESTING EXPLAINED: What you need to know about SPIVA – S&P Indices vs. Active

In this series, we debunk the jargon and explain a popular investment term or theme. Here it is SPIVA.

What is this?

SPIVA stands for S&P Indices versus Active. The SVIPA Scorecard is a report published every six months for the past twenty years by S&P Dow Indices. It compares the performance of active stock and bond funds with their index fund equivalents – crucial information for the millions who have entrusted their savings to these funds.

What is the difference between the two types of funds?

Active funds are managed by people who select stocks and bonds that have the potential to rise. Index or 'passive' funds replicate the composition of a specific market index with only modest amounts of human intervention. For this reason they are often much cheaper.

Why is the scorecard necessary?

In the $100 trillion asset management industry, the active versus passive debate has been raging for some time in a battle between humans and machines. Passive funds tend to outperform active funds over the long term.

But during periods when markets are more volatile, active managers should be able to demonstrate their star quality. Some managers are taking full advantage of these opportunities and are happy to do so for their investors. Others try their best but fail.

Give me an illustration of this

In 2022, the Scorecard shows that 49 percent of U.S. large-cap funds outperformed the S&P 500 index. That may not sound very impressive, but in 2021 only 15 percent succeeded. During that year, the index was driven higher by the rise in the share prices of the technology giants, which are overweight in the indices due to their size. Managers struggled to compete.

The European Mid-2023 Scorecard shows that 71 percent of active UK US funds underperformed in the first half of the year. However, over the same period, active UK large and mid-cap funds got off to a good start, with only 47 percent underperforming.

Why is this in the news?

The rise of passive Exchange Traded Funds (ETFs) – which can be traded all day and are therefore more liquid – is driving more and more investors into the passive cause. They are abandoning the active management groups and pulling out billions.

This has put pressure on these managers' margins, sometimes to the point of agony.

In the autumn, Abrdn CEO Steve Bird tried to sell the group's asset management arm but was blocked by the board.

Is there a chance that active funds will perform better in 2024?

It's easy to think of passive as an almost sure bet. But some observers believe that conditions could be more favorable in the coming year, although it must be said that such hopes have been dashed before.

As always, it makes sense to regularly check that the funds you hold are on the best buy lists compiled by the investment platforms AJ Bell, Bestinvest, Hargreaves Lansdown and Interactive Investor.

It's also worth taking a look at Bestinvest's Spot The Dog report, which highlights the funds that have consistently underperformed their benchmark. If you pay higher active fees, you at least deserve a manager who delivers returns.