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SPIVA Europe Scorecard: Measuring the Effectiveness of Passive Investing in Europe



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This article is sponsored by S&P Dow Jones Indices.

By Aye M. Soe, CFA
Senior Director, Index Research & Design

At the heart of the active versus passive management debate lies the theoretical underpinning that the average return of both actively and passively managed assets must equal the aggregate market, thereby making it a zero-sum game. Since the costs of active management typically exceed those of passive management, the average actively managed dollar will underperform the average passively managed dollar after accounting for costs (Sharpe 1991). Over the past few decades, this debate has inspired many passionate believers on both sides, exhibiting its staying power as one of the more hotly contested financial theories.

As a way to keep score of the ongoing debate, S&P Dow Jones Indices (S&P DJI) started publishing the S&P Indices Versus Active (SPIVA®) Scorecard for the U.S in 2002. The scorecard measures the performance of actively managed domestic equity funds across various market capitalizations and styles, as well as fixed income funds, relative to their respective benchmarks. Results can vary on a year-over-year basis due to market conditions, with indices losing out to active funds in one year but winning in a subsequent year. However, the scorecard shows that over a longer-term investment horizon, most active managers have a difficult time outperforming their respective benchmarks. The five-year performance figures show the consistent losing pattern across most equity and several fixed income categories. In addition, the report dispels myths surrounding “inefficient” markets such as small caps and the emerging markets equities, the two areas in which active investing is perceived to offer opportunities due to the mispricing of securities.

The summer of 2014 marks the inaugural launch of the SPIVA Europe Scorecard, which will be released semi-annually. The report measures the performance of actively managed European equity funds denominated in Euro and British pound sterling against their respective benchmarks over one-, three- and five-year horizons as of December 31, 2013. While the report will not end the debate on active versus passive investing in Europe, it aims to make a meaningful contribution by examining the effectiveness of passive investing in the various European market segments.

Similar to the U.S. scorecard, the European edition highlights that a bull market cycle does not guarantee outperformance of active funds. The year 2013 marked a remarkable rebound for the European equity markets, as measured by the 20.97% gain of the S&P Europe 350 Index. During the same period, the majority of the euro-denominated actively managed funds (60.69%) invested in European equities underperformed the benchmark. Similarly, over three quarters (78.92%) of the funds invested in Eurozone equities failed to keep pace with their respective benchmark. The longer-term five-year data does not favor actively managed funds investing in European and Eurozone equities either. More than 60% of European equity funds and nearly 79% of Eurozone equity funds denominated in Euro underperformed the benchmarks.

Unlike Euro-denominated performance figures, which show the effectiveness of indexing unequivocally across most categories, British pound-denominated active funds exhibit mixed results depending on the category. Over near-, mid- and long-term investment horizons, most U.K. and European equities funds have posted better returns than the benchmark, indicating that active management opportunities are present in the space.
Lastly, the SPIVA Europe Scorecard seeks to address whether emerging market equities are an asset that can be effectively accessed via passive investing. The scorecard shows that regardless of the currency denomination of the funds, a significant majority of the actively managed funds investing in emerging markets equities fail to deliver higher returns than the benchmark over near-, mid- and longer-term horizons. For example, 87.65% of funds denominated in EUR and 62.5% of funds in GBP underperformed their benchmark. The results, therefore, attest that passive investing is a viable option for the European market when it comes to emerging markets equities.

In the wake of the 2008 financial crisis, investors across the globe are increasingly concerned not just with relative performance but also the costs incurred in seeking relative performance. As such, it is only natural that the active versus passive debate will continue to spark discussion. Against that backdrop, S&P DJI aims to become an objective scorekeeper of the debate by regularly examining which pockets of the European market work better for one strategy than the other.

S&P Indices Versus Active Funds (SPIVA®) Europe Scorecard is available here. See the Scorecard

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The Slings and Arrows of Passive Fortune



This article is sponsored by S&P DJI.

If a tale were to be written regaling us with the popular exploits of the modern day active manager in his quest for alpha across the many peaks and valleys of the financial world, passive investment would likely feature prominently in the telling. Passively managed assets have grown tremendously since their introduction in the 1970s to command some 20% of the U.S. stock’s market total-float adjusted capitalization, drawing a deluge of criticism in recent years from proponents of a more traditional, active approach who charge indexers with all manner of supposed ills – from encouraging collusive behavior and exacerbating pricing inefficiencies, to indifference on matters of corporate governance.

But are passive assets and their purveyors really the threat to markets that active management makes them out to be? Or are the problems attributed to their rise merely a reflection of the market forces all participants must face? These are the questions posed by Anu Ganti and Craig Lazzara at S&P Dow Jones Indices (S&P DJI) in their new paper, titled “The Slings and Arrows of Passive Fortune,” which seeks to unravel some of the most pervasive myths surrounding the growing role of index funds, highlight the immense value they bring to asset owners, and posits a future of asymmetric equilibrium between the old and the new that puts each in their proper place based on relative – rather than absolute – performance.

Nobody – including the paper’s authors – denies that index-based investment has made life more challenging for active managers, who count alpha as their very lifeblood; but so too would it be foolish to argue its advancement as one of the most important developments in modern financial history is without merit, or somehow Thucydidean in nature. If anything, active management can and should expect its portion of the pie (which, it must be pointed out, constitutes the majority of assets by a wide margin) to remain subject to nibbles from their passive counterparts – nibbles that may, with time, diminish. The market always has room for more players at the table, after all, and we all play by its rules.

As Director and Managing Director of index investment strategy team at S&P DJI, Ganti and Lazzara provide research and commentary on the firm’s entire product set – covering U.S. and global equities, commodities, fixed income, and economic indices. Both are chartered financial analysts and regular contributors to Indexology, S&P DJI’s appropriately named blog covering developments in the world of indexing.

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Battea: 2017 Securities Class Action Industry Lookback and Observations



This article is sponsored by Battea.

Source: Battea

There has been incredible growth in securities and antitrust class action litigations and settlements, particularly as they have unfolded in 2016 and 2017. The number of new cases and settlements from traditional securities litigation to antitrust rate rigging, spread inflation and other forms of collusion are at an all time high and shows no signs of slowing down.

With several multi-billion dollar litigations related to Libor, Euribor and Tibor rates, and spread manipulations, the securities, foreign exchange and antitrust class and collective actions litigation space rose exponentially in 2017.

View Whitepaper Here

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The Future of Operations: Simplify, Innovate and Transform



This article is sponsored by Broadridge.

Now that the pain of the global financial crisis and subsequent regulations are starting to fade from view, the asset management industry is facing new challenges that will transform the business. Firms must be nimble enough to support this evolution. That means not only redesigning operations, but also adopting new technologies that can be used for innovation in-house and with the help of partners.

In active management, the industry has created more complex products to generate alpha, while the growth of passive management, spurred by fintech competition, is compressing fees. At the same time, expansion into new markets has added costs. Facing these challenges will require serious improvements to back- and middle-office operations — an overhaul of everything from data validation to trade reconciliation.

For this type of transformation, experts say, it’s not enough to improve the steps in a process. Financial institutions need to eliminate steps. Specifically, executive members of the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) say that leading firms should:

Work collaboratively. Firms should collaborate to solve common problems; use associations to identify and promote best practices; and partner with service providers, utilities and regulators to tap their specialized skills and mutualize non-differentiating functions.

Tackle common pain points. Many of the industry’s biggest challenges come from a lack of standardized processes: Standardizing data is the top challenge and sets a foundation to accelerate change.

Leverage transformational technology. Cloud computing, artificial intelligence, and distributed ledger technology can be transformational over the coming three, five or 10 years — but investing now is vital.

Assess, accept and mitigate risks. During times of large transformational change, it should be understood that risks are higher. This traditionally risk-adverse industry must balance the need for bold change against the fear of producing subpar outcomes.

This paper asks how asset managers can move beyond incremental improvements, like shaving costs from processes like post-trade settlement, regulatory compliance and reconciliation, to reimagining how operations are handled. Based on discussions with executives from leading asset management, buy-side, and sell-side firms, as well as service providers, it assesses the drivers for change and the challenges and opportunities ahead, and discusses what actions the industry must take to reach its desired future state.

The long-term vision of how asset management operations should change is best summed up by one word: Simplify.

To learn more about “The Future of Operations” for the asset management industry, download the white paper from Broadridge and the SIFMA Asset Management Group.

To learn more about Broadridge’s solutions for the asset management industry, please visit

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