Titled Lies, Damned Lies and Statistics, the short (3.5 minutes) segment recaps the phenomenon called “Survivorship Bias.”
The title of the segment is of course a famous phrase coined by Mark Twain, and is used to describe the persuasive power of numbers, particularly the use of statistics to bolster weak arguments.
When we look at the statistics of what percentage of actively managed funds underperform, they are even more dire when survivorship bias is taken into account — in other words, the industry often “shoots the wounded,” closing down poorly performing actively managed funds. This has the effect of removing them from overall performance statistics, leaving only the “survivors” or better-performing surviving funds, which naturally have better track records.
The segment features Craig Lazzara, Global Head of Index Investment Strategy for S&P Dow Jones Indices (pictured, right). Lazzara notes that the semi-annual “SPIVA” report cards in Europe show that 89% of actively managed global equity funds and 91% of US equity funds failed to beat the indexes over the last five years. And the 10-year performance numbers “are even worse.”
How widespread is survivorship bias? Well, among British small- and mid-cap funds, more than half were closed or merged over a ten-year period.