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

LG Table1 311014

LG Table1 311014

Index versus fund performance and survivorship

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

a)  Australian Equity General Funds

LG Table2 311014Contrary 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

LG Table3 311014Only 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

LG Table4 311014Only 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

LG Table5 311014Bond 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

LG Table6 311014The 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
November 01, 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

To your taste: hot cross buns and hot, cross funds

Best and worst performing equity funds of 2020

Large super funds struggle to match index in Aussie equities

banner

Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.