Warren Buffett has long favoured passive over active investing. The data shows he is right.
Actively managed funds are known for underperforming their benchmarks, and 2023 was no exception.
Among Canadian equity funds, 85% did worse than their benchmark last year, according to the annual SPIVA Canada Scorecard. The results were even worse for Canadian dividend and income equity funds, 94% of which did worse than their benchmark.
Active managers didn’t just have one bad year in 2023. They generally did even worse over longer time frames. Fully 93% of Canadian equity funds underperformed over the five-year period ending Dec. 30, 2023, as did 92% of U.S. equity funds and 94% of global equity funds.
Results mirror Warren Buffett’s advice
Significant underperformance existed in every one of the seven categories of Canadian, U.S. and international equity and other funds in the SPIVA Canada report.
The dismal results are powerful evidence for Warren Buffett’s well-known advice to investors to stick with passively managed funds and not try to pick stocks or time the market.
“The great majority of managers who attempt to over-perform will fail,” he famously said in an investor newsletter. “The probability is also very high that the person soliciting your funds will not be the exception who does well.”
Volatility offered potential opportunity
The SPIVA Canada results are even more striking when we consider what active managers often say about their offerings. One claim is that active management protects investors in down markets.
The last five years have seen a veritable rollercoaster ride of market swings—almost unprecedented in recent decades. Since 2020, we’ve seen the pandemic crash, followed by a stunning rebound, then another downturn and now another sharp uptick for stocks.
Presumably, such volatility should have been an ideal opportunity for active managers to shine and showcase the value they bring. Yet, the SPIVA Canada report shows over nine in 10 of Canadian, U.S. and global equity funds underperformed since 2020. (The report included mutual funds and actively managed exchange-traded funds. Fund returns in the report were net of fees, excluding loads.)
Percentage of Underperforming Active Funds
Two in five funds vanished in the last decade
SPIVA Canada also had other interesting findings:
- Two out of five actively managed funds merged or liquidated over the 10-year period ending Dec. 30, 2023. This includes 43% of Canadian equity funds.
- Active managers underperformed despite spikes in the dispersion of stock returns, an indicator of the magnitude of the opportunity for stock pickers to outperform. Dispersion measures the difference in performance of top-performing stocks compared to the bottom-performing stocks in a given market.
High dispersion means the top performing stocks are doing much better than the bottom performers. This means more chances for active managers to beat the market by picking the winners.
What did we see in the past five years? Dispersion spiked twice—in 2020 and again in 2022—meaning, again, a golden opportunity for active managers to prove their worth. The data shows that active managers failed to seize the opportunity.
What’s the alternative?
At PWL Capital, we agree fully with Warren Buffett’s focus on passive investment.
Our approach is to buy the whole market, but using an evidence-based methodology of overweighting more profitable, smaller and better-priced companies.
We apply this to all markets in order to capture those premiums in bull and bear markets, and we don’t try to chase winners or pick stocks.
Use data to invest with confidence
We know each client is unique; it’s not one size fits all. We help each client manage their finances with confidence, tailoring a portfolio based on their specific cash flow needs, tax situation, risk appetite and investing horizon.
We all work hard to build up savings for our retirement and make an impact for our loved ones and in our communities. To safeguard those precious savings and ensure they keep growing, it’s important to rely on the data.