Mark Twain and active management


“Lies, damned lies, and statistics”

Mark Twain


The SPIVA report provides updated statistics on how active managers are faring against the broad liquid market indices. It’s a good site to look at to bring to check how many managers outperform their index in virtually every developed market. In fact, the report can be a bit eye- opening.


For example:


“88.30% of US large cap funds underperformed the S&P 500 over 5 years” and “70% of Canadian Equity funds underperformed the S&P/TSX over 5 years”


A couple of things to keep in mind when viewing this data. First, the data changes, and manager performance can rotate in and out of favor on occasion. So the SPIVA report is an average for a group. but it’s less significant as an individual manager evaluation tool. This is because in any given period (1 year, 3 year, 5 year, etc)—some managers move up into the “outperforming” group while others drop out of it. Thus, the active managers may be constantly rotating in and out of relative performance. For example, in 2016, many true “value” managers were hammered – growth stocks were king. One of the purest value managers out there might be the ABC Fundamental Value Fund. Reading their statistics, you would have seen that they underperformed the Canadian TSX300 by a huge margin over their two year performance to July 31, 2017. However, their one year performance to July 31, 2017 doubled the index in performance.

Clearly, ABC’s “style” of valuation and trading came back into favor. I’m not here to endorse them, or any mutual fund (in fact, I tend to advise against buying funds for their costs and their inability to react in a down market) – but I am pointing out that ABC’s returns were thrown into the pool for performance numbers in studies like SPIVA. You can see that these statistics cannot remove “bad years” . Yes, it all comes out in the wash, but one bad year can be misleading, and might have prevented you from buying a fund that doubled the index a year later.

Further, if you get truly active management – that is, a manager or style of manager unafraid to raise cash, short, or hedge risk  –  the SPIVA report may not encourage you to invest with them before a market crash. Leading into 2008, the average hedge fund was underperforming. Such reports would have discouraged you from investing in them. Ironically, in 2008 hedge funds (on average) outperformed the market.

The chart below amply demonstrates the effect that the 2001 and 2008 crashes had on stock portfolios. The indexes were clobbered. From the 2000 peak it took index investors about 6 years to breakeven (early 2007). Same with the 2008 peak – it was 5 year journey (mid-2013) to become whole again for index investors. Personally, I know of many individual investors and good portfolio managers who broke even in far less time than 5-6 years. Our Equity Platform was fully recovered by the first quarter of 2010 after the ’08 – ’09 crash.

Chart of the S&P500 showing the Dotcom and 2008 crash - active management helps portfolios recover more quickly

Some managers like ourselves prefer a steady type of return over the more volatile index returns. In such cases, it’s hard to play the “me too” game of chasing irrational exuberance during a fast rising market. Cap weighted indices such as the TSX300 and S&P500 tend to overweight the current market darlings. And that’s ok, so long as markets are rising. However, performance with lower standard deviation from a mean (average) return is hard to achieve while you chase index-leading stocks that are becoming overbought.

At ValueTrend, we’ve outperformed over most time periods – click here for details. Having said that, we still go through periods of underperformance just like any other manager.  For example, we sometimes make a decision to hold cash while others gleefully pile into the market – such as now. Sometimes we’re wrong and wish we’d bought. But when we’re right-we’re right. Our biggest and best years are during times when markets act irrationally. That’s a management style that may go out of favor for a while, but the “trend” is for us to regress back to our mean performance. So in the near term, we might be added to the “underperforming the index” group – as other managers may be. But any system worth its salt will save you in the long run.

Whether you manage your own money or use a portfolio manager, stay with the active approach. It’s worth the safety – should the market turn ugly.

Upcoming presentations with Keith Richards

  1. Keith on BNN’s MarketCall Tonight show, Wednesday September 6, 2017 at 5:30pm

Keith will be on BNN’s popular call-in show “MarketCall” Wednesday September 6th for the 5:30 pm show. Phone in with your questions on technical analysis for Keith during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to [email protected]


  1. Keith at the MoneyShow Saturday, Sep 9, 2017 for 2 presentations

Click here for details.

10:45 am: How to Profit from Fear and Greed

2:45pm: Technically trading ETF’s


  • Hi Keith,
    when comparing your performance, what is the rational of using the “North American Index”? And further to that what is the rational for 85% TSX and 15% S&P? Thanks!


    • Hi Eric
      The NA index is one we’ve used for years (since 2007) because there was no index that gave us a comparative out there to our average asset mix. The problem has been that we are in and out of the US markets and other markets regualrly–so we cant just use the TSX, but we cant use the S&P500 to compare against either. So we decided back in 2007 that, on average, we have held about 15% US content over time. Yes, in recent years we’ve migrated towards more US content–but back in the 2000-2009 era we held much more Canadian equities–usually only about 5-10% US stocks back then. So its been kind of an average to say 85/15. Going forward, I think there is a good chance that we will migrate even more cash away from both NA markets and look to International (Europe specifically) opportunites. But we wont want to change our comparative 85/15 index because, a couple of years later we might be right back into our more traditional NA mix.
      This has been a discussion I had with a compliance guy on our back office desk. He suggested that our only comparable group (given that we are not mandated to stick with any specific country, (or agenda) is that of the “Canadian Focused” group of managers. These are PM’s who mostly buy TSX stocks BUT can buy up to 40% “other” index listed stocks.

      Then again, perhaps we are like a hedge fund, in that we hold lots of cash at times (like right now–at 40% cash we are certainly not typical of a mutual fund or traditional manager). But I’m not sure we should use a hedge fund index as a comparative. After all, we are not registered as such…

      Further, we don’t do a C$ comparative index on the US stocks. The falling loonie helped us in 2014-2016 – but its rise hurt us this year (the loonie rose from $0.68 at the end of 2016 to almost $0.80 today –which is a double digit drawdown on our US stocks in CDN $ terms!). We figure that is part of our decision making (to under or overweight currencies)–clients get the positive or negative performance of currency shifts, and we must accept that against a neutral index. A US portfolio held in USD will look better than us with our CDN$ converted US stocks–it works both ways.

      For us, there has never been a good index to compare to–and my compliance friend has been unable to find anything that resembles an index to use for us. So we stick with the 85/15 – as imperfect as it may be.
      Hope that helps.


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