Only one in seven SA fund managers beat the index

Latest SPIVA scorecard makes tough reading for active managers

CAPE TOWN – In challenging markets, active managers like to argue that they have an advantage over index trackers. When volatility is high and there are big dispersions between the stocks that are performing well and those that are doing poorly, they start up a familiar refrain: “this is a time for careful stock-picking,” they say.

It’s an argument that makes intuitive sense. When returns and valuations are all over the place, active managers should have an advantage in being able to identify and exploit mis-pricings in the market.

And certainly it’s safe to say that now is just such a time. For the year from 1 July 2015 to 30 June 2016 the FTSE/JSE All Share Index was more or less flat, but there was a lot of volatility in between. From the low point that the market hit in mid-January to the high it reached at the end of May was a difference of 17.7%.

This is an environment in which active managers should be out-performing. While index-trackers are simply following the market, stock-pickers should be able to see through to the opportunities that lie beneath the surface.

And yet, the latest S&P Indices Versus Active (SPIVA) scorecard for South Africa released on Tuesday shows that this simply isn’t the case. For the 12 months to the end of June 2016, just 23.95% of South African equity funds produced returns above the S&P South Africa domestic shareholder weighted index.

Over five years, active managers have found it even more difficult to beat the index. Over that period, only 13.68% are in the black against the benchmark.


Percentage of South African funds out-performed by benchmarks

Fund category

Comparison index

One year %

Three year %

Five year %

SA Equity

S&P South Africa DSW




Source: S&P Dow Jones Indices


It’s important to note that the SPIVA scorecard also accounts for survivorship bias. It takes into account all funds that were available at the start of the period, and not only those that were still around at the end of it.

This is significant because figures from Morningstar show that nearly a quarter of all South African equity funds that were active five years ago have either liquidated or merged. If those were not accounted for, the number of funds beating the index would appear much higher.

What is also telling is that these numbers have shown a significant decline from just six months ago. For the year to the end of 2015, 49.37% of South African equity funds beat the same benchmark, and over five years the number was 25.42%. In other words, the performance of active managers in the current environment has gotten worse, not better.

This is a very important consideration for investors. When active managers tell them that “now is the time for stock picking”, they need to ask whether there is any evidence that actually backs that up. It’s certainly good marketing, but investors should question whether it is supported by the numbers.

This is illustrated even more strongly if one looks at the performance of local managers running global equity funds. Whether over one year, three years or five years, under 10% of active-managed funds have beaten the S&P Global 1200.


Percentage of South African funds out-performed by benchmarks

Fund category

Comparison index

One year %

Three year %

Five year %

Global equity

S&P Global 1200




Source: S&P Dow Jones Indices


According to Morningstar’s figures, there were only 31 global equity funds available at the start of this five year period. If you do the calculation, that means that only a single one of them beat the benchmark.

These numbers make it obvious that on a pure performance basis, active managers are finding it very difficult to keep up with a broad market index. Despite an environment that they themselves argue is conducive, a significant majority is under-performing.

However, investors should also be wary of assuming that this past performance is everything. There are currently notable risks associated with investing in passive funds, most notably the way that Naspers has come to dominate local indices.

The stock accounts for nearly 20% of the S&P South Africa DSW Index, over 15% in the FTSE/JSE All Share Index and just under 19% in the FTSE/JSE Top 40. What this means is that the performance of the entire index is heavily determined by just one stock.

This is an example of a risk that stock-picking fund managers will be able to manage better than their passive counterparts, and why investors should particularly look for those that build portfolios that look very different to the index. Blending these kinds of funds with an index tracker will give them a much better risk-return profile and ensure that they get the best of both worlds.


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What? No indignant denial.

Just to balance the view, here’s a well written article from an active manager’s point of view.

I believe the vast majority of retirement savers invest in a balanced portfolio – that is to say, very few investors simply go out an put there life savings in a JSE Alsi tracker fund.

If we start to look at the active vs passive debate bearing this in mind, the picture becomes much more murky.

Now it is possible to build a balanced portfolio using passive products, but as the article will show you, your decisions in portfolio construction are much more active than you might believe.

The naspers comment is also nonsical. Their were times in the past when gold companies dominated top 40….in fact…up to 60% of the index. As they lost value, they were replaced by companies who were increasing in value. That’s the entire point of an etf. Remove the ” I know when to enter and exit market” mentality that leads to underperformance. The s&p 500,was also dominated by IBM, coca cola etc in its past…as apple currently does now. Since we don’t know exactly when apple will stop performing, active management is hocus pocus.

Mr meet…here is my balanced view. Used financial advisers and companies for 16 years. Although one of the longest bull markets in history….my funds grew poorly due to fees and underperformance. For the past 4 years I have invested after doing my own homework…etfs only…both local and offshore…and I regualarly achive the same performance as the top 10 funds of any given year. The financial industry are a bunch of leeches. Period.

“I have invested after doing my own homework” – aren’t you then classified as an active investor?

But let me guess, the other 6 still took home huge salaries and even better bonuses….

End of comments.





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