LATEST SPIVA REPORT

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LATEST SPIVA REPORT

Post by Ron Mann »

For the three quarters of 2005, according to the S&P SPIVA (S&P Indices Versus Active Funds scorecard) report issued today.

S&P/TSE Composite Index beat 86.6% of Canadian equity funds.
S&P 500 Index (in Canadian $) beat 62.4 % US Equity funds.
BUT
67.5 % o fCanadian Small Cap Equity funds beat the S&P/TSE Small Cap Index

Let the debate continue!
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Post by brucecohen »

From today's Investment Executive e-mail service:
Actively managed funds lag benchmarks: S&P


Less than one-third of equity funds beat the index


Wednesday, February 22, 2006


By IE Staff





Actively managed mutual funds in the Canadian and U.S. equity categories continued to lag their respective benchmarks in 2005, Standard & Poor’s said today. According to the Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA) for Canada, the S&P/TSX Composite Index outperformed 87.1% of actively managed Canadian equity funds in 2005, while the S&P 500 Index (measured in C$) outperformed 57.8% of U.S. equity funds. Actively managed Canadian small-cap funds have fared better, however, with 63.4% beating the S&P/TSX SmallCap Index in the past year.

“Less than one-third of actively managed Canadian equity funds have outperformed the S&P/TSX Composite Index over the past five years,” said Jasmit Bhandal, director of business development for Standard & Poor’s Canadian Index Services. “In contrast, active managers of Canadian small-cap funds have had a better chance of beating their benchmarks, which is commonly believed to be a result of the relative inefficiency of the market.”

Longer-term results for Canadian equity, small-cap, and U.S. equity funds continue to be consistent with past results. Over the last three years, 8.15% of actively managed Canadian equity funds have outperformed the S&P/TSX Composite Index, 65% of actively managed Canadian small-cap funds have outperformed the S&P/TSX SmallCap Index and 31.9% of U.S. equity funds have outperformed the S&P 500 Index. Five-year average fund returns show active funds underperforming both the S&P/TSX Composite Index and the S&P/TSX Capped Composite Index, both on an equal- and asset-weighted basis.

A key attribute of the SPIVA methodology is its correction for survivorship bias, which can significantly skew results as funds liquidate or merge. Five-year survivorship ranges from 63.3% to 65.2% for the Canadian equity, Canadian small-cap, and U.S. equity fund categories. This suggests that roughly one-third of funds in these three categories has merged or liquidated in the past five years
SPIVA methodology is here




[/quote]
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Post by IdOp »

Regarding the majority of small-cap funds beating the small-cap index, this is certainly no violation of index theory. Here are two things that can contribute significantly to explaining it:

1) Small cap managers may have invested outside of the index in a significantly beneficial way (e.g., held cash, foreign securites or large/mid caps -- whatever would have helped over the given time period).

2) Not all participants in the small cap market were included in the result. Particularly: this includes the small cap holdings of broadly based active Canadian equity funds. (Probably less significant are small individual investors, foreign funds, etc.)

As for the "common belief" that it's due to the bugaboo of "market inefficiency", I have no idea what that's supposed to mean, but no concept of efficiency is required to derive the basic facts of indexing, nor is its absence required to explain outperformance of
this type. BTW, the same is true for short time periods, as I've sometimes heard incorrectly given as reason why index theory is inapplicable/violated etc
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Post by NormR »

IdOp wrote:Regarding the majority of small-cap funds beating the small-cap index, this is certainly no violation of index theory.
We are definitely into theory here. As a retail investor, how can I actually buy the small-cap index via an index fund or ETF?
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Re: LATEST SPIVA REPORT

Post by George$ »

Ron Mann wrote:For the three quarters of 2005, according to the S&P SPIVA (S&P Indices Versus Active Funds scorecard) report issued today. ... Let the debate continue!
Three quarters! They are looking at noise (and imagining a signal). :roll:
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Post by IdOp »

NormR wrote:We are definitely into theory here.
Yes. When the "common beleif" is wrong, review the theory!
NormR wrote:As a retail investor, how can I actually buy the small-cap index via an index fund or ETF?
I have no idea, never wanted one for myself. If enough people clamour for one, the industry will provide? (-;
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Post by DanH »

IdOp wrote:
NormR wrote:As a retail investor, how can I actually buy the small-cap index via an index fund or ETF?
I have no idea, never wanted one for myself. If enough people clamour for one, the industry will provide? (-;
I disagree. Barclays has been offering iMidCap for a few years. Also, Barclays' use of the S&P/TSX Composite (over the old TSE 300) is a sign that they want to stick to indexes with enough liquidity to handle institutional investments. The reason why ~80 stocks were deleted from the old TSE 300 is because of this liquidity issue.

Small caps have strongly outperformed. If there was a way to create an iUnits Canadian Small Cap Index fund, they'd have done it in the last slew of new products - which included dividend and materials stocks.

iMidCap is as close as it'll get, I'm afraid.
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Post by Norbert Schlenker »

As S&P tries to confound access to such reports and to put them in tiny windows (at least for me with Firefox), let me perform a public service. The direct link is

http://www2.standardandpoors.com/spf/pd ... recard.pdf
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Post by IdOp »

Very good points DanH. With tongue planted even more firmly in cheek than my prior reply: one could always buy a broad TSX composite mutual fund, and then go short on XIU and XMD.
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Post by NormR »

IdOp wrote:Very good points DanH. With tongue planted even more firmly in cheek than my prior reply: one could always buy a broad TSX composite mutual fund, and then go short on XIU and XMD.
Doesn't sound very cost effective for a retail investor (who might not even be able to short ETFs). A low cost active fund might be a better alternative in this case.
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Post by Shakespeare »

Doesn't sound very cost effective
Would be very expensive because all costs would be attributed to the small difference between large numbers (a 1% cost on a difference of 20% is a 5% burden on the difference) and would have high tracking errors.
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Post by gyrfalcon »

NormR wrote: A low cost active fund might be a better alternative in this case.
Saxon Small Cap, held 7 yrs now, with a CAGR of 16.1%, is starting to look like it might be a keeper :wink:
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Post by adrian2 »

Shakespeare wrote:
Doesn't sound very cost effective
Would be very expensive because all costs would be attributed to the small difference between large numbers (a 1% cost on a difference of 20% is a 5% burden on the difference) and would have high tracking errors.
As I've mentioned before, an even bigger problem with this strategy is the fact that retail investors do not get any interest on proceeds from a short sale and cannot use that money to purchase another investment.
If there is enough cash in the account the cost is currently about 3% (interest which is not earned).
If one uses margin, the cost is roughly double (margin interest paid).
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Post by DenisD »

The Active vs. Passive Debate Moves To Global
What is interesting in the latest SPIVA report from July 19th is that S&P has extended their work into international equities, including emerging markets.
http://www2.standardandpoors.com/spf/pd ... 006_q2.pdf
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Latest Canadian SPIVA report is out...

Post by tidal »

Latest Canadian SPIVA report is out...

Index Versus Active Funds Scorecard for Canadian Funds, Second Quarter 2006

"Over longer time periods, we continue to observe indices outperforming a majority of active funds. Over the past five years, 13.9% of actively managed Canadian Equity funds have outperformed the S&P/TSX Composite Index, 43.8% of actively managed Canadian SmallCap funds have outperformed the S&P/TSX SmallCap Index and 25% of U.S. Equity funds have outperformed the S&P 500 Index."

"Five-year survivorship ranges from 60% to 66% for the Canadian Equity, Canadian SmallCap and U.S. Equity fund categories. This suggests that approximately one in three funds in these three categories has merged or liquidated in the past five years. Three-year survivorship is between 53% and 78%."

etc., etc., etc.
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Post by parvus »

tidal wrote:
Latest Canadian SPIVA report is out...
Then there's this:
A complaint lodged against many managers of funds that invest in stocks is that they collect big fees for doing little more than basing their stock picks on the market index -- say, the Standard & Poor's 500-stock index -- against which their fund's performance is measured. There's even a term for this behavior: closet indexing.

For investors, there hasn't been an easy way to tell if a fund falls into this category. Now a pair of Yale University professors have developed a simple way of measuring to what degree a fund's holdings are actively managed, as opposed to passively mirroring an index. It also turns out that -- at least according to the research -- this measure could be a useful predictor of fund performance.

The new measure, created by Antti Petajisto and Martijn Cremers from the Yale School of Management, takes a simple approach. Called the "active share" of a portfolio, it matches the holdings reported by a fund in Securities and Exchange Commission filings against the components of an index, and then measures the percentage of overlap. For example, if General Electric (GE) and Exxon Mobil (XOM) each account for 4% of an index, and a fund had a portfolio exactly mirroring the index except it had 8% in GE and nothing in Exxon, its active share would be 4%. The more a portfolio differs from an index, the higher the active share percentage.

The study found that the average fund using the S&P 500 as a benchmark (generally, funds investing in large-company stocks) has an average active-share percentage of 66%. In other words, the average large-company stock fund had a portfolio that was 66% different than the benchmark and the rest essentially mirrored the index.
The full paper is here, along with some examinations of the costs index investors inadvertently bear.
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Post by pitz »

adrian2 wrote: As I've mentioned before, an even bigger problem with this strategy is the fact that retail investors do not get any interest on proceeds from a short sale and cannot use that money to purchase another investment.
Retail investors can short the TSE60 futures though, at far less cost than trying to short an ETF.

One TSE60 contract is what, ~138k of notional value these days? Not too far out of reach of 'retail investors' if it was a viable strategy to pursue.

The embedded cost of carry on the TSE60 futures is approximately 4% (including dividends), which is consistent with the 3-month yield curve. Spreads will hurt you slightly, but its not too difficult, in an IB account, to go long XIC, and roll over short positions in SXF (TSE60 futures) if you really want to synthesize Canadian smallcap exposure.

In fact, even buying XIU, and shorting SXF might not be a bad idea for a taxable investor because the taxable investor is receiving valuable Canadian dividend income, and receiving capital losses in return. A tax arbitrage scheme of sorts for investors who pay a lower marginal rate on dividends than they do on capital gains. And the capital requirements would be minimal since there is no value at risk, and mark to market account gains/losses would only consist of ETF and futures tracking error.
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Post by parvus »

pitz wrote:
In fact, even buying XIU, and shorting SXF might not be a bad idea for a taxable investor because the taxable investor is receiving valuable Canadian dividend income, and receiving capital losses in return.
Depends; the proceeds of short sales may count on the income account, instead of the capital account.
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Post by pitz »

parvus wrote:pitz wrote:
In fact, even buying XIU, and shorting SXF might not be a bad idea for a taxable investor because the taxable investor is receiving valuable Canadian dividend income, and receiving capital losses in return.
Depends; the proceeds of short sales may count on the income account, instead of the capital account.
http://www.cra-arc.gc.ca/E/pub/tp/it346r/it346r-e.html

Hmmmm. Is an equity index a commodity?
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Post by parvus »

pitz referenced:
7. As a general rule, it is acceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses with the result that only one- half the gain is taxable, and one-half the loss is allowable subject to certain restrictions, (hereinafter called "capital treatment") provided such reporting is followed consistently from year to year.*

8. If a speculator prefers to use the income treatment in reporting gains and losses in commodity futures or commodities, it may be done provided this reporting practice is followed consistently from year to year. If income treatment has been used by a speculator in 1976 or a subsequent taxation year, the Department will not permit a change in the basis of reporting. *Interpretation Bulletin CPP-3 discusses the effect of the income treatment and capital treatment on self-employed earnings for the purposes of the Canada Pension Plan.
Now, on short sales:
17. The presumption that gains from security transactions are on income account will also be taken by the Department in any situation where it is apparent that the taxpayer has used special information not available to the public to realize a quick profit.

18. The gain or loss on the "short sale" of shares is considered to be on income account.
Is an equity index a commodity? I don't know. But I would be wary.
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Post by tidal »

Standard & Poor's Indices Versus Active Funds Scorecard, Third Quarter 2006
Indices Continue to Outperform Canadian Active Funds in Q3 - PRESS RELEASE
o Over longer time periods, we continue to observe indices outperforming a majority of active funds. Over the five-year period ended Q3 2006, less than 10% of actively managed Canadian Equity funds have outperformed the S&P/TSX Composite Index, 47.2% of actively managed Canadian SmallCap funds have outperformed the S&P/TSX SmallCap Index and almost 15% of U.S. Equity funds have outperformed the S&P 500 Index...
o Five-year survivorship ranges from 60% to 64% for the Canadian Equity and Canadian SmallCap fund categories. Indicating that 36% to 40% of funds in these categories has merged or liquidated in the past five years. For the US Equity fund category, during the same period, survivorship is only 44%--out of the total funds in this category that existed at the beginning of the period, less than half remain today.
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Post by Money101 »

From the above article:

"Truly alpha oriented (beta-neutral) strategies, if they really exist after fees and are repeatable, is the only domain left for active management. "

What are alpha oriented strategies?
Thanks in advance.
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Post by parvus »

money 101 asked:
What are alpha oriented strategies?
Assume beta is captured by the indexes. Assume the indexes are investable (through an ETF). Alphais the potential return above the index.

In theory, no one consistently beats the index; the market is the market, we all participate in it, we're all average, the winners and losers, in aggregate, net out, and what we can expect from the market is some share of all the economic growth registered by all the companies in a country — sorta like socialism. That's beta.

Alpha opportunities exist for a variety of reasons. One is that indexes don't cover all investable opportunities. Another is that, for reasons of liquidity (how easy it is to buy and sell shares), investable indexes don't include all investable opportunities. A third reason is that indexes are weighted by market capitalization: the more investors pile into a company, the bigger its share of the index. In theory, an alpha opportunity exists in shorting "momentum" stocks whose business fundamentals can't realistically sustain the hype.

Tidal, I believe, posted a piece that said that alpha is a zero-sum game. For every market outperformer, there has to be an underperformer, on average.
The Tao of Alpha

This is a surprisingly good article, especially considering the source. And very readable.

"Even the least sophisticated of hedge fund investors understand that alpha is something to be pursued. The irony is that many an investor and fair few hedge fund professionals only have a vague understanding of what alpha really is or the important principles that underlie it. Alpha's precise definition, its short supply, the impediments to finding it, and its real utility are not well understood. This article corrects this by presenting an intuitive explanation of what alpha really is..."

"...This is because, quite simply, the total amount of alpha available in the world is precisely nil. To say there is not enough to go around is an understatement—there is absolutely none..."
True, in theory; in practice alpha can be earned by playing off institutional constraints (they can only own the most liquid stocks), by investing in the non-indexed components of a company's capital structure (debentures, warrants, rights), or by trying to buy good stocks and sell bad stocks short.

But the truism holds. Not all alpha managers are above average, not in theory, not in practice. Risky business, to be sure. (Yogi, I'm sure, will have some things to say.)
Last edited by parvus on 23 Nov 2006 23:21, edited 1 time in total.
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Post by Money101 »

Thanks for that explanation, Parvus.

So, would precious metals be an example of investments that are typically "alpha"?
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Post by Norbert Schlenker »

Parvus will no doubt have an excellent but complicated answer. The short answer to your question re precious metals is "No".

Alpha is what you get from active management that works. There is no active management in precious metals per se. You can buy that exposure - which is beta exposure - for next to nothing. It might be wrapped up with alpha ("Our gold fund managers are so clever that you'll make tons of money") but only the tonnage associated with benchmark outperformance is alpha.
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