Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 184

Some active managers succeed while the majority struggle

The active versus passive debate rolls ever onwards, and Cuffelinks has published many articles from both sides of the debate. For example, Chris Cuffe has explained how he picks active managers that have outperformed the index over the years, while we have reported in the past on the S&P Indices Versus Active Funds (SPIVA) Australia Scorecard.

According to S&P’s latest report to June 2016, the majority of active Australian equity and bond funds continue to consistently underperform their benchmarks.

However, while it’s not pretty overall for most active managers, there are sectors where active does well, and it’s possible to identify active opportunities in sectors where passive managers are more successful overall. Even if the majority of active funds do not justify their fees, it does not mean that it's not worth finding those managers who do add value consistently.

The report evaluated the performance of 608 Australian equity funds (large, mid, and small cap, and A-REITs), 294 international equity funds, and 66 Australian actively managed bond funds over one, three, and five-year investment periods.

SPIVA’s annual scorecard is now in its 14th year and serves as “the de facto scorekeeper of the active versus passive debate”, the report states.

“There is no consistent trend in the yearly active versus passive index figures, but we have consistently observed that the majority of Australian active funds in most categories fail to beat the comparable benchmark indexes over three- and five-year horizons,” the report adds.

Flat year, flat funds

In a year in which the S&P/ASX200 was almost as flat as a pancake, registering only a 0.56% gain, Australian large-cap equity funds posted an average return of 0.09%, with close to 60% of them underperforming the S&P/ASX 200. Over the five-year period, 69% of funds in this category underperformed the benchmark.

Large-cap funds were not alone. The majority of ASX equity funds underperformed benchmarks over all three time frames. International Equity, Australian Bond, and A-REIT funds were the worst performers over the three time frames.

A-REITs big relative underperformers

A-REIT funds recorded an average return of 22%, lagging the S&P/ASX 200 A-REIT benchmark by 2.5% over the 12-month period. The majority of funds lagged the benchmark, with 87.5%, 93.1%, and 92.4% underperforming over the one, three, and five-year horizons respectively.

Adrian Harrington, head of funds management at Folkestone Limited, said success as an active A-REIT fund over the long run depends on the management and their investment approach. The smaller conviction-based funds don’t worry about benchmark weights and are not bound, like bigger A-REIT funds, to invest in the ASX200. The top six managers in the A-REIT sector outperform the index, usually because they manage smaller, high-conviction funds that can invest in individual A-REITs based solely on merit.

The larger funds, he said, had been victims of their own success:

“They have so much money that they’re bound by rules which prohibit them from stepping far outside the high market-cap property stocks. Westfield and Scentre comprise 36% of the index, while the top eight stocks comprise 80%, so it’s very highly concentrated. Those funds have to hold a certain percentage of Stockland or Mirvac stock in their portfolios, regardless of whether they like them as investments or not. The index has nearly a 60% exposure to retail shopping centres, which is ok in boom times but in reality represents a higher investment risk during periods of more normalised returns.”

Mid and Small-Caps outperform over longer term

The majority of ASX Mid and Small-Cap funds lagged their indexes over the shorter one and three-year periods, but a healthy 62% outperformed the benchmark over the five-year period by an average of 3.6%, and some by a far more significant margin.

Glennon Capital Managing Director Michael Glennon said he was not surprised by the longer-term result. “Small cap managers understand markets and businesses and they have a feel for momentum. To invest solely in small caps you need to understand what the market has an appetite for and what is behind a company’s growth story.”

Glennon said small-cap funds are not constrained by weightings and can pretty much invest in whatever they like. “The companies we invest in can potentially double their market caps in a relatively short space of time, whereas a $25 billion fund is not likely to grow to $50 billion in just a few years.”

International equities, bonds poor relative performers

The S&P Developed Ex-Australia LargeMidCap recorded a return of 0.9% over the 12-month period. However, international equity funds posted an average loss of 2.1%, and 80.7% of those funds underperformed the benchmark. Over 90% of international share funds underperformed the benchmark over the three and five-year periods.

The average return of international equity funds consistently lagged the S&P Developed Ex-Australia LargeMidCap by more than 2.6% in the three and five-year periods.

The S&P/ASX Australian Fixed Interest Index gained 7% in the 12 months to June, while Australian bond funds recorded a smaller average gain of 5.6%. Some 89.5% of funds underperformed the benchmark, while 92.2% and 88.7% of funds lagged the benchmark over the three and five-year periods respectively.

Funds merging and liquidated

Five per cent of Australian funds from all measured categories merged or were liquidated over the year ending in June. International equity funds disappeared at the fastest rate (6.9%).

ASX funds had an overall survivorship rate of 78.4% over the five-year period. Bond funds had the highest rate of survival (83%), while international equity funds had the lowest, with more than a quarter either merging or being wound up.

 

Alan Hartstein is Deputy Editor of Cuffelinks.

 

RELATED ARTICLES

History suggests the Magnificent Seven are headed for a fall

The opportunity cost of low fee structures

Good active managers are hard to identify

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.