S&P 500 Historical Annual Performance vs. Dow

After today's selloff, the S&P 500 is up 7.8% for the year (ex-dividends) while the Dow is only up 2.9%.  This means that the S&P 500 is outperforming the Dow by 490 bps, which seems like a lot given that the indexes are both large cap indices.

Still if the indexes ended the year with this performance, it wouldn't be the largest historical spread between the two.  In 55 years of S&P 500 history, there have been 10 years that it has beaten the Dow by more than 5% (ex-dividends).  There are also 9 years that the Dow has beaten the S&P 500 by the same spread.

Makes you think--what's the point of benchmarking active managers if even similar benchmarks outperform one another from year to year?

CalPERS 2011/2012 Investment Performance

CalPERS, the country's largest pension fund reported investment performance for its most recent fiscal year today.  Below are the numbers, which are less than stellar.  Since June 2011, CalPERS' investment portfolio returned 1% vs a 7.5% target.  Returns relative to the portfolio's benchmark for 2012 are below:

Given the size of the portfolio that CalPERS is managing, perhaps it's somewhat excusable that the fund earned a 7.73% return per year over the last 20 years.  Still, the fund has returned less than its benchmark (however that's defined) over the 1, 3, 5, 10, 15 and 20 year time period.

Comparing Fund Managers to Golfers and Par

A perennial argument against "active" investment management is that the majority of fund managers don't outperform their benchmarks.  Last year, 84% of managers trailed their benchmarks, a pretty damning statistic. 

Since I like to do offbeat posts on Friday, I thought it might be interesting to compare that statistic to the number of golfers who shoot par.  It turns out that the relative aptitude of golfers and portfolio managers is pretty similar.  Only 25% of golfers break 90.  Less than 1% are scratch golfers.  If par is the benchmark, then most golfers are failing miserably.  Of course, this is a snapshot of all adult golfers, not professionals.  Professionals are expected to break par.  Also, you can't make a decision to "invest" in a par scorecard like you can an index portfolio like SPY.

Still, the very idea of benchmarking performance against an index is one that needs to be considered holistically.  After all, there is no such thing as completely passive management.  If not at the security selection level, there is an active decision made at the asset allocation level.  There are just fewer institutionalized benchmarks to measure the quality of those decisions.  There are likely very few investors with the stomach to hold the SPY as the only holding in their portfolio and keep it that way through retirement, so very few people really get the index return anyways.  Any deviation from the index would technically be underperformance.