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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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Transforming Saudi Arabia’s Capital Markets

This article is sponsored by State Street.


– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation

– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.

– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.

– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.

Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1

While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.

To read the full study please click here.

1 Foreword to Vision 2030,

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Sovereign Wealth Funds as a Driver of African Development

This article is sponsored by Quantum Global.

Sovereign wealth funds (SWFs) are becoming important sources of development in many countries. African SWFs have been growing in recent years, as many countries joined the international trend in establishing SWFs, while many others are preparing to join. Growth of SWFs has been driven by rising commodity prices until 2014 and improving economic growth rates. At the same time, Africa continues to face a number of development challenges, raising the question of whether SWFs can play a role in fostering economic development on the continent. This paper analyses the dynamics and role of SWFs in promoting development in Africa. The paper notes that SWFs can play a more active role in Africa’s development by bridging the infrastructure funding gap, supporting industrial development and economic diversification, reducing macroeconomic volatility and enhancing intergenerational equity. For SWFs to be effective in delivering their mandates and supporting economic development, they need to have clear goals and objectives, improve their governance and transparency frameworks, improve their risk management frameworks and embrace the Santiago Principles. African governments need to develop more attractive frameworks and climates for SWFs to invest in the continent, especially in sectors that contribute more directly to addressing Africa’s development needs.

To read the full study please click here.

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Collateral: The New Performance Driver

This article is sponsored by BNY Mellon.


In 2017, the global buy-side community faces considerable liquidity and funding pressures, stemming from market and regulatory reforms that are causing disruption. As a result, access to high-quality collateral, funding and liquidity is not only a pressing concern but has emerged as the essential new performance driver for the buy-side.

This disruption is the result of two opposing forces. Stringent regulatory requirements are forcing market participants to seek collateral — generally of high quality — in order to secure trading exposures. At the same time, the sell-side — or dealer-sponsored financial plumbing used to supply liquidity and collateral to the market — is experiencing challenges due to Basel III capital and liquidity constraints.

A major concern among multiple buy-side firms is that the next market-stress event will occur not because of a lack of collateral in the financial system but rather due to the inaccessibility of this collateral.¹ This scenario is forcing firms to reevaluate their collateralized trading portfolios, recalibrate asset allocation strategies and in some cases review the investment products offered to end clients.

This paper presents the findings from BNY Mellon–PwC outreach to senior buy-side executives from over 120 global firms conducted during the first quarter of 2017. It provides insights on demand-supply imbalances that are being experienced by buyside firms and the possible solutions they are exploring in response to fears that ready access to liquidity and high-quality collateral may become scarce in the years ahead.

The picture that emerged from these discussions was one of a buy-side community both grappling to adjust to its new collateralized trading obligations as well as striving to secure access to sustainable sources of funding and liquidity.

To read the full study please click here.

1. Collateral can be inaccessible due to decreasing velocity of collateral, which indicates how much, on average, a single dollar of collateral is reused over a period of time. This is analogous to the concept of “velocity of money.”

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