the active vs passive debate: is the answer clear-cut?€¦ · 3/10/2017 · this webinar is...

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The Active vs Passive Debate: Is the Answer Clear-Cut?October 3, 2017

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Director of Institutional Investors Division

CVM

Daniel Maeda is a civil engineer who graduated from the Brazilian Federal University of Rio de

Janeiro, and joined CVM in 2005. From 2009 to 2014, Daniel was responsible for the

Registration and Authorization Department at the CVM’s Institutional Investors Division, and

since then until 2016, worked as the head of the Market Structure Department, as part of the

Market Surveillance Division. Since 2016, he has been the head of the Institutional Investors

Division, an area responsible for the registration, supervision and enforcement of a USD 1 trillion

investment fund industry. Before that, Daniel worked as an analyst in financial institutions and

auditing companies.

Daniel Maeda


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Director, Global Research & Design

S&P Dow Jones Indices

Phillip Brzenk is Director, Global Research & Design, at S&P Dow Jones Indices (S&P DJI).

Phillip is responsible for conceptualization, research and design covering global strategy, factor

based, alternative beta and thematic equity indices.

Prior to joining Global Research & Design, Phillip spent five years in the index management and

production groups at S&P DJI, where he was involved in the index management of strategy and

custom indices.

Phillip is a CFA Charterholder and a member of the New York Society of Security Analysts. He

has a bachelor’s in Management with a concentration in Finance from the Georgia Institute of

Technology.

Phillip Brzenk, CFA



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Active vs. Passive

October 3, 2017

Copyright © 2017 by S&P Global. All rights reserved.

World Investor Week




Agenda

Comparing Performance - SPIVA® Scorecard

Impact of Fees

Future of Active vs. Passive

8




The SPIVA® Scorecard

• The S&P Indices Versus Active (SPIVA®) Scorecard is a widely followed report which measures the performance of actively managed funds versus their respective benchmarks over near-, mid-, and longer-term investment horizons. The report accounts for:

• Survivorship correction

• Apples to apples comparison

• Asset weighted versus equal weighted returns

• Style consistency

• Data cleaning to avoid double counting multiple share classes

9




10




SPIVA® United States – Equity Funds 11

Percentage of U.S. Funds Outperformed by Benchmarks

Category Comparison Index 1-year (%) 3-year (%) 5-year (%) 10-year (%) 15-year (%)

U.S Equity

All Domestic Funds S&P 1500 47.5 85.6 84.4 85.4 84.6

Large-Cap Growth Funds S&P 500 Growth 37.9 74.8 76.4 92.3 95.1

Large-Cap Core Funds S&P 500 60.8 90.7 85.1 91.6 96.3

Large-Cap Value Funds S&P 500 Value 52.3 87.2 88.6 64.2 83.1

Mid-Cap Growth Funds S&P 400 Growth 49.3 85.4 85.2 98.3 96.1

Mid-Cap Core Funds S&P 400 68.5 89.5 87.3 95.8 97.0

Mid-Cap Value Funds S&P 400 Value 67.9 81.8 86.2 88.8 87.0

Small-Cap Growth Funds S&P 600 Growth 49.7 88.0 90.1 95.5 99.4

Small-Cap Core Funds S&P 600 66.0 91.5 95.4 93.6 96.2

Small-Cap Value Funds S&P 600 Value 62.7 92.5 95.2 93.3 79.7

International Equity

Global Funds S&P Global 1200 56.3 75.1 79.9 79.8 84.8

International Funds S&P International 700 77.8 57.4 71.9 79.9 91.5

International Small Cap Funds S&P Developed Ex US Small Cap 46.2 67.8 70.9 64.3 83.3

Emerging Markets Funds Funds S&P Emerging Markets 75.4 80.2 75.3 87.9 95.2

Source: S&P Dow Jones Indices, CRSP. Data as of 06/30/2017. Charts and tables are provided for illustrative purposes.




SPIVA® United States – Fixed Income Funds 12


Fixed Income Funds Outperforming the Benchmarks

Category Comparison Index 1-year (%) 3-year (%)5-year (%) 10-year (%) 15-year (%)

Government Long Funds Barclays US Gov’t Long 10.7 96.6 100.0 95.3 98.2

Government Intermediate Funds Barclays US Gov’t Intermediate 57.9 76.2 88.9 83.7 87.7

Government Short Funds Barclays US Gov’t (1-3 Year) 50.0 70.4 83.9 79.4 91.7

Investment-Grade Long Funds Barclays US Gov’t/Credit Long 4.4 97.8 85.5 96.6 97.7

Investment-Grade Int Funds Barclays US Gov’t/Credit Intermediate 24.9 50.2 40.6 57.3 75.9

Investment-Grade Short Funds Barclays US Gov’t/Credit (1-3 Year) 19.5 48.5 34.5 68.8 71.4

High Yield Funds Barclays US Corporate High Yield 83.3 90.1 91.0 97.5 98.3

Mortgage-Backed Securities Funds Barclays US Agg Securitized - MBS 54.7 66.0 70.2 76.7 90.0

Global Income Funds Barclays Global Aggregate 13.5 45.3 43.8 64.4 70.0

Emerging Markets Debt Funds Barclays Emerging Markets 23.3 84.6 90.2 76.5 66.7

General Municipal Debt Funds S&P National AMT-Free Municipal Bond 71.6 50.0 34.2 68.4 86.7

Loan Participation Funds S&P/LSTA U.S. Leveraged Loan 100 61.2 34.0 56.8 - -




SPIVA® Latin America 13

Source: S&P Dow Jones Indices, Anbima, Morningstar. Data as of 06/30/2017. Charts and tables are provided for illustrative purposes.

Percentage of Funds Outperformed by Benchmarks

Category Comparison Index 1-year (%) 3-year (%) 5-year (%)

Brazil Equity Funds S&P Brazil BMI 69.5 68.1 76.9

Brazil Large-Cap Funds S&P Brazil LargeCap 80.4 62.8 85.9

Brazil Mid-/Small-Cap Funds S&P Brazil MidSmallCap 57.7 82.4 82.5

Brazil Corporate Bond Funds Anbima Debentures Index (IDA) 92.4 65.2 90.4

Brazil Government Bond Funds Anbima Market Index (IMA) 88.8 84.1 77.1

Chile Equity Funds S&P Chile BMI 80.5 81.4 89.1

Mexico Equity Funds S&P Mexico BMI 85.7 85.1 64.4




Outperformance Is Fleeting 14


19.7

15.7

5.9

0.0

21.6

33.0

11.7

1.1

15.3

25.3

8.4

0.00

5

10

15

20

25

30

35

BasePeriod

Year 1 Year 2 Year 3 BasePeriod

Year 1 Year 2 Year 3 BasePeriod

Year 1 Year 2 Year 3

All Large-Cap All Mid-Cap All Small-Cap

Percent of Funds that Consecutively Outperform (U.S.)




Active Management During the Bear Years 15

90

52

22

54

89

62

67

75

96

83

73

84

4953

37

54

82

70

83

77

88

71

58

72

0

10

20

30

40

50

60

70

80

90

100

Growth Core Value All LargeCap

Funds

Growth Core Value All MidCap

Funds

Growth Core Value All SmallCap

Funds

Large-Cap Mid-Cap Small-Cap

Percentage of Funds Underperforming (U.S.)

2008

2000-2002

Source: S&P Dow Jones Indices LLC, CRSP. Data as of 09/30/2017. Charts and tables are provided for illustrative purposes.




Active vs. Passive Funds Fee Comparison 16

Source: S&P Dow Jones Indices LLC, Morningstar. Data as of December 2014, as reported in the SPIVA U.S., Canada, Europe, India, Latin America and South Africa Scorecard Year-End 2014.

Charts and tables are provided for illustrative purposes.

Average Annual Expense Ratios

Region Active Funds (%) Passive Funds (%) Difference (%)

Cumulative Impact of Fee

Differentials Over Five

Years (%)

Developed Markets

Canada Equity 2.14 0.95 1.19 -6.09

Europe Equity 1.88 0.34 1.54 -7.93

US Large Cap 0.75 0.27 0.48 -2.42

US Mid & Small Cap 1.13 0.37 0.76 -3.85

Emerging Markets

Chile Equity 4.50 2.52 1.99 -10.33

Mexico Equity 2.02 0.42 1.60 -8.28

Indian Equity Large Cap 1.87 0.49 1.37 -7.06

Indian Equity Mid/Small Cap2.00 1.00 1.00 -5.12




Clear Divergence of Asset Flows

Source: S&P Dow Jones Indices LLC, Morningstar. Data as of 03/31/2017. Charts and tables are provided for illustrative purposes.

-1500

-1000

-500

0

500

1000

1500

US Equity Net Fund flows ($bn)

Active Funds Passive Funds

Estimated Net

Flows

Mar 2017

($mil)

1 Year

($mil)

Assets ($bn) Mar 2017

($mil)

1 Year

($mil)

Assets ($bn)

U.S. Equity (18,588) (269,658) 3,724 31,132 300,332 3,231

Sector Equity (2,421) (31,024) 390 2,640 57,294 443

International Equity (2,852) (70,313) 1,527 20,595 104,840 1,046

Allocation (1,367) (43,272) 1,214 674 1,148 62

Taxable Bond 19,796 96,309 2,378 18,304 165,446 977

Municipal Bond 786 19,021 625 416 6,022 29

Alternative 383 (12,287) 165 344 496 46

Commodities 152 1,660 26 (437) 2,360 65

All Long Term (4,111) (309,564) 10,049 73,667 637,939 5,899

Money Market (19,271) (100,533) 2,623

Active Passive

17




Alpha

Beta

Pure Alpha

(Pure Manager

Skill)

Outcome

Oriented

Solutions

Systematic Risk

Premia

Asset Class

Beta

Index

Alternative Beta

Strategy Indices

Multi Asset

Strategy Indices

Exogenous to

Indexation

Market

Benchmarks Lo

w C

ost,

Sys

tem

ati

c

Sc

arc

e, M

an

ag

er

skil

ls

Index

Index

S&P 500

S&P Euro 350

S&P Global BMI

S&P Stride

S&P Dynamic

Tactical

Allocation Index

S&P Small Cap

Quality

S&P High Yield

Low Vol Corp

S&P Momentum

Reclassification of Alpha

Source: S&P Dow Jones Indices LLC. Charts and tables are provided for illustrative purposes.

18




Performance Disclosure

All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at www.spdji.com.

S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index are first considered live: index values provided for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the public, for example via the company’s public website or its datafeed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but that may have been prior to the Index’s public release date.

Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.

Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.

The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200).

19

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S&P Dow Jones Indices

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BlackRock

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Further Content of Interest:

• Research

SPIVA Latin America Mid-Year 2017 Scorecard

SPIVA Institutional Scorecard: How Much Do Fees Affect the

Active Versus Passive Debate?

• Indexology: Explore the Active vs Passive Debate

• Index TV: What’s Next in the Active vs Passive Debate?

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