SPIVA Report 2023: Unraveling the Active vs. Passive Fund Debate

The age-old debate between active and passive fund management continues to capture the attention of investors worldwide. On one hand, active funds rely on fund managers’ expertise to outperform benchmarks through strategic stock selection, albeit at higher costs. While active funds promise the allure of generating alpha, the ground reality often paints a different picture.

To shed light on this ongoing discourse, the SPIVA (S&P Indices Versus Active) report, a widely respected study by S&P Dow Jones Indices, provides a comprehensive performance analysis of actively managed funds versus their benchmarks. Let’s dive into the latest findings from the SPIVA India Mid-Year 2023 report and see what it reveals about the true face of fund performance.

What is SPIVA?

SPIVA—short for S&P Indices Versus Active—serves as the global standard for assessing how active fund managers fare against market benchmarks. Published biannually, SPIVA delivers in-depth insights across multiple regions, including India, the United States, Canada, Europe, Japan, Australia, and several others.

Key Highlights:

• Covers over 100 fund categories globally

• Offers insights based on extensive and independent data

• Evaluates funds across asset classes and geographies

• Provides an objective lens on the active versus passive performance debate

The SPIVA India report has become a trusted benchmark for investors seeking transparency on how mutual funds stack up against their indices.

SPIVA India 2023: Key Findings

Large-Cap Funds: A Tough Battle

• Three-Year Period: 86% of funds lagged the benchmark.

• Five-Year Period: A staggering 93% underperformance.

• Ten-Year Period: Underperformance reduced to 61%, offering some hope to long-term investors.

ELSS Funds: More Than Just Tax Saving

Equity-Linked Savings Schemes (ELSS), popular for their Section 80C tax benefits, also faced challenges:

• 56% over three years, 71% over five years.

• 67% underperformance even across a ten-year span.

This underperformance has led to regulatory innovations like Index ELSS funds, offering investors the twin benefits of tax saving and cost-effective passive investing.

Mid and Small-Cap Funds: A Glimmer of Hope

The performance in the mid- and small-cap segments presents a mixed picture:

• 78% underperformed over one year.

• 53% underperformance over three years.

• Encouragingly, only 38% underperformed over a five-year horizon.

While challenges remain, the data suggests better performance consistency in this segment compared to large-cap funds.

Debt Mutual Funds: Facing Tough Times

Debt mutual funds were notably underwhelming:

Clearly, the fixed-income space is not immune to the struggles of active management either.

SPIVA Scorecard: 3-Year Overview

Source: SPIVA India Mid-Year 2023 Report

Asset Management Companies’ (AMC) Response to SPIVA Findings

While the SPIVA report provides valuable data, Asset Management Companies (AMCs) have raised some valid critiques:

• Benchmark Discrepancies: AMCs argue that the SPIVA report often uses indices that differ from the funds’ own benchmarks, leading to an uneven comparison.

• Total Return Index (TRI) vs. Price Return Index (PRI): In India, fund performance is generally benchmarked against the TRI, not the PRI. Globally, fund comparisons are typically gross of expenses, whereas the Indian model is net of expenses.

• Rolling Returns vs. Point-to-Point: AMCs believe that rolling returns present a more accurate picture of consistent fund performance across different market cycles, unlike point-to-point returns, which might be skewed by specific market events.

In essence, AMCs advocate for a nuanced interpretation of fund performance that considers both benchmark alignment and long-term return consistency.

Active vs. Passive: The AUM Growth Story

The growth trajectory of Assets Under Management (AUM) highlights the evolving investor preference:

• Active AUM (Equity + Hybrid Funds):

• Passive AUM (Index Funds + ETFs + Gold ETFs + Fund of Funds):

  • ₹7.9 lakh crore as of September 2023, compared to ₹4.34 lakh crore in September 2021.

While active funds dominate the overall AUM, passive investments are growing rapidly, signaling a shift towards cost-efficiency and index-based investing among Indian investors.

Conclusion

The SPIVA report provides a critical lens through which investors can assess the active vs. passive fund debate. Despite the promises of alpha, a majority of actively managed funds continue to underperform their benchmarks across multiple timeframes.

As investors navigate an increasingly complex market landscape, insights from SPIVA serve as a valuable tool for making informed, data-driven decisions. While active management has its merits, the compelling case for passive investing—especially given lower costs and consistent performance—continues to gain traction.

Ultimately, a well-balanced investment strategy, rooted in clear understanding and diligent research, remains the cornerstone of long-term financial success.