A SPIV, in the beautifully old fashioned slang favoured by my mother, is a sharp dresser that makes his living in usually disreputable ways – Arthur Daley take a bow!
… A SPIVA … well that’s a completely different story!
In a follow up to why index funds are a good start to investing in shares, Slack Investor was combing the press (rather than his hair!) this week and came across this cracking group of financial wonks known as SPIVA that love nothing more than analysing reams of financial data. Slack investor loves a well constructed piece of research that he doesn’t have to do himself – and for 14 years they have been looking at world markets and publishing reports every half year.
There are two main types of funds: Active Funds where the stocks are actively managed according to financial experts – they control the stock selection and timing of the buys and sells – their expertise does not come cheaply and to piggy back onto their knowledge you have to pay a management fee of usually 1.5 to 4% every year. You can invest in these funds directly by filling out an application form – or you could buy shares on the ASX in a Listed Investment Company (LIC) such as Argo or AFIC.
Passive Funds are constructed in such a way that they passively follow an index. These funds can be mostly automated and are much cheaper to run. They have annual management expenses of usually less than 0.5% per year.
What do the wonks at SPIVA think about the Australian Active vs Passive scene? Their mid-year 2016 report is full of interesting stuff but the killer finding is that nearly 60% of large cap actively managed funds failed to beat the ASX 200 index (passive) in the most recent financial year, with this number rising to nearly 70% over a five-year period.
Things are even worse for international stocks, SPIVA reports that over 80% of Active international equity fund managers underperformed their benchmark index. This rises to over 90% over a five-year period.
Slack Investor is not against individual active fund managers … some are very good, … consistently … Roger Montgomery comes to mind … but because of the much smaller annual fees that they charge, passive funds seem to have a great edge in most cases … and the data from SPIVA bears this out. There is much more to say on the pros and cons of managed funds … and exchange traded funds vs individual stocks … but this will have to be another post(s).