Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 86

Good active managers are hard to identify

Standard & Poor's undertakes a semi-annual review of the performance of actively-managed funds compared with S&P indexes, and the June 2014 ‘SPIVA Australia Scorecard’ was recently released. The Scorecard measures both equal weighted (where every active fund is given the same weighting) and asset weighted (where a fund’s weight depends on its assets) returns from actively-managed funds.

It’s important to know some limitations of the SPIVA Scorecard. Actively-managed fund returns are measured after expenses, whereas index returns have not had investment fees deducted, which exaggerates the returns achievable from following a hypothetical index. Also, some indexes used in the scorecard, such as bond indexes, may not be easily replicable. The Scorecard only utilises five highly aggregated fund categories that can be lined up with available comparator benchmark indexes.

Overall, active funds struggle to beat index

The Scorecard finds that the majority of actively-managed funds failed to beat their comparable benchmark indices over a one, three or five year period. In Australian equities, the mainstay of most Australian portfolios, the underperformance of actively-managed funds against the comparator index was reasonably consistent across one, three and five year periods at 66%, 66% and 75% respectively.

The only exceptions in performance versus index are actively-managed small cap funds, the clear majority of which beat their comparable indexes across all time periods.

Summary Table: Percentage of actively-managed funds outperformed by their comparable index

Index versus fund performance and survivorship

Taking a look at the percentage returns across the five asset categories:

a)  Australian Equity General Funds

Contrary to popular belief, the findings suggest large funds in Australian equities have better returns than smaller ones, because the asset weighted returns were higher than the equivalent equal weighted returns across one, three and five years by 0.38%, 0.96% and 0.81% respectively.

81% of managed funds in this group survived the five year period.

b)  Australian Equity Small-Cap Funds

Only 8% of small cap funds failed to beat their comparator indexes across a one or three year period, and 17% across a five year period. Over all periods the investment returns from actively managed small cap funds held a massive lead over the comparator index.

83% of funds in this group survive the five year period, the highest of all the groups used in the Scorecard.

c)  International Equity General Funds

Only 78% of funds in this group survived more than five years, the lowest survivorship recorded of the groups used in the scorecard. The first Summary Table above showed the percentage of actively-managed international equity funds failing to beat the index was the highest of any asset class across one, three and five years at 79%, 88% and 86%. When 8 or 9 out of every 10 managed funds fails to beat their index, it suggests the markets are so well researched that it’s tough to gain an edge after fees.

d)  Australian Bond Funds

Bond indexes are also not truly replicable which limits the useability of the data. Over a five year period the performance return difference of around 0.2% between a bond fund and a hypothetical bond index is extremely small, considering fees have not been deducted from the hypothetical bond index. Managed bond funds had a survivorship rate of 82% for a five year period. The Summary Table above showed the percentage of managed bond funds failing to beat their index respectively across one, three and five years was 80%, 87% and 67%.

e)  Australian Equity A-REIT Funds

The A-REIT index recorded the strongest investment return over a five year period of all the asset classes at 14.32%. Asset weighted returns were above equal weighted returns suggesting that larger A-REITS perform better than smaller ones. Over a five year period 79% of A-REIT funds survived, which is lower than the survivorship rates of either domestic equity or bond funds. The Summary Table showed the percentage of actively managed A-REIT funds that failed to beat their comparator index across one, three and five year periods was 55%, 80% and 79%.

Tough finding good active managers

The SPIVA numbers once again demonstrate how difficult it is to identify active managers who justify their fees, other than in the small cap space. While no doubt there are talented asset managers who do outperform their index, by far the majority do not. The challenge for the investor who wants alpha above the market beta is to find a way to identify the minority of managers who add value over time. Many can do it for a short period, but investing is a long term activity.

 

Les Goldmann has over 20 years’ experience as a Chartered Accountant, and his roles have included freelance journalism, shareholder advocacy for the Australian Shareholders Association and senior roles in the commercial and non-profit sectors.

 

3 Comments
Ramani
October 31, 2014

Predicting the past is bad enough, let us not go near the future. It will come, anyway.

A contrary perspective awaits if we mandate every manager who trumpets its superior performance ('due to our outstanding skills', of course) is forced by law to equally publicise its woeful performance ('due to volatile markets, the GFC, the alignment of Saturn across the vernal equinox, everything but our skills-deficit', of course). If not. ASIC should do this for them and send them an invoice with a service fee and GST added.

Markets are like crowds. If frenzy overtakes them, authorities are powerless and will be stupid to get in the way. Those who get into markets active or passive must accept the risks. Marketers downplay them while analysts make a living out of them using the rare quality of 20:20 hindsight.

Erich Sehgal's "Class of 64" starts with the Harvard Dean reminding the proud students that the medical profession has found plausible cures for a handful out of thousands of ailments. The rest by implication is placebo, ingested with large doses of faith. So it is with investments. Like language construction, active or passive, the message is unchanged.

Graham Hand
October 31, 2014

Jason, thanks for the comment but I take exception to your final sentence. Cuffelinks is supported by both active and 'passive' managers, and in Chris Cuffe's covering note, he said his personal belief is that it is possible to pick active managers who outperform. We're not taking sides here, we're reporting the work of authorities in the market for our readers to make up their own minds. We have a highly diverse set of supporters - we'd need to disclose some interest on every article if we go down that path.

Jason
October 31, 2014

So why does the number 1 performing Industry super fund in Australia over a 10, 5 year and 1 year time frame put it's performance down solely to the selection of active fund managers. For the majority of do it yourself investors you're better off sticking to passive investors and get sub standard returns. Perhaps if you're really worried about fees just buying the big four banks, telstra and BHP and you've replicated the Australian market. But for me I've been an adviser for 15 years and use both active and passive managers and have outperformed the best performing super funds over the last 10 years by selecting a combination of active managers with some passive managers added. Perhaps greater education around the selection of active managers is warranted. Nice disclosure also that a passive manager is a major supporter of this publication.

 

Leave a Comment:

     

RELATED ARTICLES

History suggests the Magnificent Seven are headed for a fall

Track if your fund manager is taking the best shot

What super funds and their fund managers now think

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Investment strategies

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Economy

US election implications for investors and Australia

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes, trade wars and policy uncertainty. Here's what it means for markets going forward.

Retirement

The rising tension between housing debt and retirement balances

Australians are taking more mortgage debt into their 60s than ever before. Retirement planning assumptions haven’t adapted and could result in future income projections that ultimately disappoint retirees.

Investment strategies

Why megatrends can deliver big upside (and downside)

The magnitude and duration of society's most important trends are often underestimated. While these trends are usually touted as a tailwind, one in particular could have dark consequences for many assets.

Property

Fixing the construction industry house of cards

Australia needs to build new homes like never before but construction firms keep going belly up. Unless regulators act now, consumers will continue to carry the can.

Investment strategies

How investor portfolios have become riskier versus history

Risk in portfolios has dramatically increased as time horizons have shortened and investors have piled into equities. It's resulted in a growing disconnect between what investors need and what the financial industry is delivering.

Shares

The abacus, big data and a brief history of indexing

Equity indices have evolved over time, led by step-changes in our ability to manipulate data. Despite the rise of passive investing, they weren't initially meant to be investment tools.

Sponsors

Alliances

© 2024 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.