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Do you know which benchmark your equity fund manager is using?

And does it matter?

Every unit trust in South Africa has to publish a fund benchmark. In the case of equity funds, this benchmark is usually market index, which indicates the standard against which the fund should be measured.

“The benchmark is there so that you know what the fund manager is trying to achieve,” explains Morningstar investment analyst Gerbrandt Kruger. “It gives you an idea of their objective.”

As portfolio manager at Fairtree Capital, Rademayer Vermaak, points out, there are two parts to this:

“The benchmark allows you to measure the performance of the manager, but also the relative risks that the manager is taking against that benchmark in order to try to outperform,” he says.

Investors may be under the impression that this means that all unit trusts in the same category use the same benchmark. However, this is far from the case.

Figures from Morningstar, captured in the table below, show that active managers in the South African general equity category are using 14 different benchmarks between them.

Benchmarks used by active SA general equity unit trusts


Number of funds

FTSE/JSE All Share SWIX Total Return Index


FTSE/JSE All Share Total Return Index


SA General Equity Fund Category Average


FTSE/JSE Top 40 SWIX Total Return Index


FTSE/JSE Top 40 Total Return Index


FTSE/JSE Capped All Share SWIX Total Return Index


FTSE/JSE Shari’ah All Share Price Return Index


FTSE/JSE All Share Price Return Index


Composite of FTSE/JSE All Share & MSCI World


FTSE/JSE Capped All Share Total Return Index


SA Shari’ah Equity Fund Average


Dividend yield of 1.5 times that of the FTSE/JSE All Share Index


FTSE/JSE All Share SWIX Price Return Index


Composite of FTSE/JSE All Share SWIX Price Return and STeFI


Source: Morningstar

The Swix and All Share Indices are clearly the most popular, followed by a peer group average. Few managers are using capped indices, and a handful benchmark themselves against price return indices, which do not take into account the reinvestment of dividends.

The first question this raises is whether this makes any difference to the average investor.

“I don’t think most investors know the difference between the All Share Index, the Capped All Share Index or the Swix,” says Kruger. “Typically when they look at the market they look at All Share Index returns, and don’t realise that their fund might be benchmarked against something else.”

So should it matter to investors what benchmark is being used? Pieter Koekemoer, the head of personal investments at Coronation says that the answer really depends on its purpose.

If the manager uses a ‘clean slate’ approach, which means that they pay no attention to the benchmark when picking stocks, then the benchmark is only there to help you evaluate whether you are receiving value for money. If however the manager is charging performance fees for outperformance, then it becomes more important.

“You then have to ask whether the benchmark is fair,” Koekemoer says. “For example, does it make sense for a fund with high equity exposure to use an absolute benchmark, such as cash-plus. Or if a fund uses a peer group average, what is the quality of that peer group?”

Both Koekemoer and Vermaak argue that any benchmark should be investable. In other words, it should represent a genuine alternative portfolio that an investor could hold.

“The way we think about it is that you should try to find the best representation of how an investor could construct a similar portfolio in a passive manner,” says Koekemoer. “That makes for a good benchmark – one that an investor can replicate and best expresses the opportunity set you have as an active manager. If we want to prove that we can add value, we need to show that over time we can outperform that quantitative benchmark.”

Vermaak adds that this is why peer group averages are problematic.

“If the market is investable, then I believe that the market should be the benchmark,” Vermaak says. “I think it’s dangerous territory to benchmark yourself against your peers, particularly if most of them underperform an investable benchmark.”

Coronation’s Koekemoer adds that peer group benchmarks also don’t acknowledge the options available to investors.

“It inherently assumes that the alternative investment is another active manager,” Koekemoer says. “That may have been true 20 years ago, but with a fairly sophisticated passive market it isn’t the case any more.”

A fund that uses the price return rather than the total return index should also have an overwhelmingly good reason for doing so. Dividends make up a significant part of any investment return, and if you’re not taking those into account in your benchmark, then the bar you are setting yourself as a fund manager is naturally much lower than one where the reinvestment of dividends is factored in.

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The U/T business is a rip off with all their benchmark rules, what they seem to have forgotten about is that they should be trying to grow the wealth of their clients not how much fees and out bonuses they can gouge from the client. U/T’s are a long term investment so the benchmark should be set at a value above the 12 – 36 month FD interest rate. Where the funds achieves its stated return % then the “out bonus” should be shared – 90% to client and 10% to the company managing the portfolio

I would disagree with you on the rip off statement. We have gr8 managers. Let me point out that in the ZA property sector the lowest cost ETF (most common local ETF) is out performed by 58% of the active unit trusts namely 21 out of 36 over 3 years. No 5 year record yet. If we move to the resources sector again the most common 2nd lowest cost ETF is out performed by 100% (bar 1) of the unit trusts over 3 and 5 years and is in the last position. Somehow paid commentators are pushing passive investing for some benefit.
The facts don’t lie or try to forecast great returns.

Very important subject.
Allan Gray uses the sector average as benchmark to calculate their 20% performance fees.
This average is calculated after costs and deducted from their performance before costs to calculate outperformance.
So if the average management fee in the sector is 1%, that means investors automatically pay a .23% (VAT incl) performance fee if AG performs in line with the markets(Zero alpha earned). This is unacceptable in my view.

Allan Gray’s Equity fund performance is excluded from calculation to determine the sector average for their performance fees

I would hope so. How does your point relate to my comment?

Also, why does Allan Gray use the Firstrand daily interest rate on their Optimal Fund that has exposure to equities? Maybe it is the rate they earn from the margins on their derivative positions, but its not correlated to their returns and their returns have a much higher standard deviation to this daily interest rate which is lower than an NCD

I always check the correlations between the benchmark and the managers returns. They should be quite high. I check if the managers highest return coincided with the benchmarks highest return. Do their lowest 1-year rolling returns occur at similar times? Finally, check the information ratio to see if the manager is consistently outperforming and run away if you see something meaningless like CPI + 4%. If a manager doesn’t know how to set a proper benchmark then its a good indicator that he/she lacks any investment skill and any of his/her past outperformance was done to luck.

Few funny indicators. Is it not the reason why most active funds get knocked by all for not beating their benchmarks? One of my gr8 ZAR global funds beat their peers each time the rand goes stronger and in the top 10 over any period. Also in top 8 in AUM

End of comments.





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