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Is active management really better in negative markets?

What has the experience been in South Africa over the past five years?

For the five years to the end of November 2018, the FTSE/JSE All Share Index (Alsi) delivered a total return of just 5.5% per annum. It was also a fairly volatile ride to get there.

During this time there were five periods of six months or shorter in which the index fell 9.5% or more, from peak to trough. Two of those took place this year.

If one takes 2018 as a whole, and combines those two periods, the Alsi peaked at 61 684 in late January, but had fallen to 50 434 this week. That is a total decline of 18.2%. Given that the technical definition of a bear market is a 20% fall from a 52-week high, the JSE is only barely avoiding this distinction.

While markets never move in a straight line, this series of corrections has been particularly frustrating for local investors. If you had been listening to the arguments of a number of active managers, however, this should have been a period in which they could show off their skill. By limiting the impact of these market drawdowns on their portfolios, they had an opportunity to out-perform.

Protecting a portfolio

Back in 2016, Coronation illustrated this point through a hypothetical comparison of three different managers. The first, a ‘steady manager’, delivers 4% outperformance every year for five years. The second, a ‘lumpy manager’, delivers the same ‘aggregate alpha’ of 20% over the period, but it comes in fits and starts. The third outperforms by 20% in the first year, but then delivers market-related performance from there.

The table below shows how these different scenarios led to meaningfully different cumulative returns:

What is significant is that the first year of this theoretical five-year period is a bear market. The manager who provides the best protection during this time ultimately outperforms substantially even though their subsequent returns are well below those of their peers.

This is really due to simple arithmetic. If you lose 50% of the value of your portfolio, you then need to generate 100% growth just to get back where you started. If you only lose 30% of its value however, you need a 43% recovery to return to the same point.

The active argument

For many years, a number of active managers have used this reasoning to argue for why their approach to investing is better than using index funds. Just a few months ago, the CEO of 50 Park Investments, Adam Sarhan, made exactly this point in a Forbes article.

“The passive camp argues that investors should buy and hold because the stock market has steadily rallied over the past 100 years and the returns match the benchmark you follow,” he wrote. “The big flaw in their argument is that there is no downside protection and your account can be cut in half (or worse) during protracted bear markets.”

Theoretically, this is a good argument. Using good portfolio construction and risk management, active managers should be able to limit the drawdowns in their portfolios.

Recent experience in South Africa, however, shows that this isn’t happening in practice. Data from Morningstar shows that over the past five years, the majority of actively managed South African general equity funds have experienced larger drawdowns than two prominent Alsi index funds:

Comparison of maximum five-year drawdowns
Gryphon All Share Index Fund max drawdown -15.62%
Number of active funds with lower max drawdown than Gryphon 25
Number of active funds with greater max drawdown than Gryphon 68
Satrix Alsi Index Fund max drawdown -16.05%
Number of active funds with lower max drawdown than Satrix 29
Number of active funds with greater max drawdown than Satrix 64

Source: Morningstar

Over this period, the active fund with the lowest maximum drawdown was the Old Mutual Albaraka Equity Fund, at -9.42%. The highest was the Investec Value Fund, at -38.72%. This shows a wide dispersion, and the index funds sit well above both the mean and the median.

Overall 68.8% of active funds showed greater maximum drawdowns than both index funds. In other words, a large majority of active managers failed to provide investors with greater protection over the last five years.


The argument that active managers provide better downside protection does not, therefore, reflect the experience of South African investors over the past five years. Active management has not been inherently better in negative markets.

This does not however mean that all the funds that showed larger drawdowns than the index trackers ultimately underperformed over this period. There were a number that did. In fact, the PSG Equity Fund, which showed among the highest maximum drawdowns, was one of the top five performing funds over these five years.

Neither does it mean that all of the funds with lower drawdowns than the index trackers outperformed. In fact, the majority did not.

It simply illustrates that generalised arguments about when or where active management or index funds may be better or worse are probably no more than distractions. What’s more important is for investors to align themselves with a philosophy that they understand and which they believe will serve their goals over the long term.

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The financial industry is a scam, set up to benefit the industry itself, using the investors as their fodder. My wife’s long term family financial advisor charges a cool 3% in fees to meet them once a year for a portfolio that has lost value over the last 5 year (not even factoring in inflation). I really don’t see any relevance to active management in its current format, it’s designed to be legal theft, nothing more

3% mate? Sheesh.

How has the value-added been? In terms of bettwe finacial decisions, etc.?

Is he actively managing your funds? Becuase if not then you’re paying his fees plus the fund fees. Its almost impossible to generate real (i.e. inflation-beating) returns.

Stick to passive funds. And generally with lots of offshore exposure.

RSA is a mess. However, problem is if yoh leave now you crystallize the losses. Open a brand new fund and ask your FA to align his fees with market or charge a fixed nominal fee.

This is a complex market. Patience and resilience is needed. You need someone you can trust.

Good luck.

Hi Mountainboy

I’m pretty 3% is the all-in cost. That’s the combined cost of the financial advisor fee, the platform fee, the fund manager fee etc.

Passive and active have both gone for a ball of poo in the past years.

Best to have a combination of passive and active strategies.

The markets will turn. And when they do, you want active managers who can outperform in a growth phase rather than passives who will only ever give you the market return or there about.

My financial advisor only charges me .75%

Mountainboy, you seem to be confused about the differences between an active manager, passive manager and financial advisor. An financial advisor is not an active manager.

There is so much investment info on ones fingers tips to guide personal investment decisions that FA’s have outlived what ever worth they prescribed to own

And with all this investment info available the same that active managers source, its all comes down to fees

A local fin blog that I have come across beats any advice from slimy FA’s and advice that used to be projected on MW

The trick the fund managers pulled on everybody is to tie savings/retirement administration to their service and charging a fee on the total funds. Imagine banks charged fees based on how much money you have with them.

Is there a SKILL difference managing R1b for 10,000 pensioners over managing R1t for 10 milllion? Is there even even much of difference in effort? There is a thousand times difference in fees though.

What would trustees pay these “investment professionals” for their professional skill per se? ie somebody else does the member admin for a few rand per member per month. Coronation and the others consult on where the underlying funds are invested – for a professional fee… like engineers and other professionals are paid for their skill

It all comes down to fees, as the article demonstrated, both passive and active can have major draw-downs and upsides but passive funds charge a lot less than active funds.

There are several reputable funds that outperform the index funds after costs. In a bear market I definitely feel more secure with a reputable fund manager. This is my experience with my company pension fund as well as my LISP investments.

Maybe its time for these FA’s to take a whole new approach to their fee structures. Consider you engage an FA who will give you CPI plus 3% for which there is an agreed fee. If the FP exceeds this benchmark then any percentage above the benchmark is shared equally. If the FP doesn’t meet the benchmark then fees are waived totally and if returns are substantially below the benchmark then the FP must bear 50% of the loss with the client. This will sort out the really good planners from the run of the mill person who is not worth their fees anyway

You may inadvertently be inviting unscrupulous FAs to takes with your money in Funds with undue risk and volatility.

Because if they dont beat the benchmark, they dont get paid. So they’re incentivised to try and shoot the lights out to share in out performance.

Investing is a marathon, not a sprint. But more like a marathon that takes 5 – 35 years…

grahamcr – I am fascinated that you think the financial planners remuneration should be linked to the market, surely you mean the fees charged by the assets manager, the actual party which is responsible for the underlying investment of the funds?

An FP provides advice, this my cover investment strategies, or estate planning, risk planning, corporate structures, offshore tax advice, inter-generational wealth planning, etc. A lot of this has nothing to do with investments and generally entails an invoice. Here comes the interesting part, if I am to invoice a client R20,000 for my services, i can do this with an invoice, or i can deduct 1% from a R2mil investment over a year – the platform just provides me with an easier billing facility.

Investments returns are only 1 lever in a clients financial planning journey.

The real problem with these articles are that they take into account the entire unit trust universe in SA, and this includes all the CR*P out there. A basic filter system (manager tenure, fees, sharp ratios etc) would leave you with only a few top managers in SA, who generally do outperform after fees.

I have been doing my own investments since 2008. I have outperformed every fund manager/investment house over that period.

The investment companies have big building and their employees drive fast cars because they are taking of the money that you give them.

There’s nowhere else that there money comes from. Only your pocket.

Ag no man Spark, you don’t understand! The fun damagers offer unique insight and value add based on proprietary models based on years, nay decades, of Excel experience behind a desk.

Spark i have news for you. If it is true that you have beat the experts then you are unique. If i look at my financial advisers company, which isn’t a Sanlam/ Old Mutual size but has a staff of less than 100. In-order to achieve results you need a research division, admin and back office staff. Would you invest money with someone in a squatter camp? No so they need decent offices. Remember impression is the key word. My adviser drives a R300 000.00 plus car and his wife an old Toyota Corola. when he isn’t seeing clients he uses his wife’s car. They live in an ordinary home. his bosses drive the flashy cars and live in flashy homes but they are directors and have worked their way up. Take directors of any decent business and see what they drive and where they live.
Don’t knock the financial advisers they have been to university and have to keep updating their qualifications. They are actually doing a good job. I haven’t gained money or lost anything over the last 3 years but nor has the economy. In fact the value of your rand has gone down.

Dayview it sounds almost like you are a financial advisor yourself. You seem to know a heck of a lot about this supposed advisor of yours.

Incidentally in the past 3 years I have been making between 10% and 17% each year.

Great that the economy is flat, but then why are you investing in the economy? Is that what your advisor told you to do? “Hold on, because it will get better?”


I have news for you.

A drunk blindfolded monkey would statistically beat more than half the fund managers if we put said monkey on revolving chair in a rondawel and gave it darts to throw at a wall full of stocks.

In a few years we will all look back in amazement at this era. Never before have so many paid so few so much for nothing at all.

What is wrong with the current debate is confusing active and passive. Passive / ETF will give the market but the market also goes down. Passive should be 0.1% fees, there are actually free ETF now (make their money lending script).

Active is a different debate that 99/100 actives have lost when it comes to fees relative to alpha. Compound fees on total capital invested negates the whole debate. The future of active has to be risk share : stupendous fees for actual alpha delivered, no fees for no delivery, pay in for under-performance. If they can’t back their talk, they should not be in the business of professional investment.

The average fund manager does not generate enough excess return over and above the market return to justify his fees.

A number of active fund managers do outperform. However, that list is a moving target, so the ability to consistently identifying them and being able to buy and sell them at the right time, is as difficult as stock picking itself.

Can’t believe the comments I read on these articles it’s like everyone has become communists. Products have premiums, premiums have costs built in them. Advice and services are not free. If you don’t like or understand what you have or contribute to then go where it’s better for you. A free market will dictate where money goes and what consumers take. Example we paid an architect to draw our plans he wasn’t the cheapest or the most expensive but I liked him. I’m sure he had the same or similar plan done already to the one he presented and we accepted. His cost went up as the square meters did. Looking at it now almost complete, we getting comments of how nice and different it looks. What if we received negative feedback on the design.? This is how a free market works.

I think some you here are conflating the role of a financial planner with that of a fund manager.

It’s the fund managers job to give returns. The financial planner matches the investor with funds that are congruent with your risk profile, investment objectives and risk tolerance.

A good financial planner will give a full view of your financial health. Your estate plan, risk cover, Will, retirement planning, tax planning etc.

Do you know about the tax consequences of different investment vehicles?
About S12J investments?
About tax-free savings?
About off investments and asset swaps?
About the effect of dying intestate and/or without succession planning if your a business owner?

Controlling costs is very important, hence ETFs and passive funds should form part of any portfolio. But the empirical evidence gathered over decades (Delbar etc) shows that DIY investors are worse off than those who sought professional advice.

Ask your financial planner the right questions to get the right advice. Ask him to explain his/her value proposition and justify their fees.
Part of the their job is control the emotive factor that comes with financial decisions and investing.

But if you think your financial planners job is to sell you a portfolio and unit trusts in the hope that you beat the market, you’ve missed the beat. In that case, you’re right, you probably dont need one.

Patrick these equity funds can they move between different asset classes like cash, property and bonds?

Equity funds must hold at least 80% in listed equities at all times. This includes listed property.

In practice, most of them are fully invested all of the time and don’t go below 95%. The remainder of the portfolio would be cash.

The simple truth is that people in general can’t manage money effectively. Yes they can make money and obviously spend money – but they can’t manage money, ie to invest well. That’s why money managers play an essential role in the economy.

For example a dentist can make serious dough doing implants and root canals, and dentures and so on, but his knowledge of investing is limited – so he turns to an investment professional.

The truth hurts. It’s fact people with advisors on average save more, this is fact.
Why because they sold to save, nobody wakes up and says I need that RA, mmm that tax free saver yes, that unit trust. It doesn’t matter where you do it as long as you do it for 3-5 decades and then don’t touch it, because that’s the biggest problem. If people can touch it they will.

Most fund Damagers will underperform in both bear and bull markets – proven already many times over.

– also they have fund constraints e.g. 100% local equities so they have their hands tied anyway if they see a market crash coming.

Financial planners should in theory be able to help investors allocate assets efficiently and reduce potential losses.

– A decent one will rebalance assets with combination of client needs + market conditions.

– Pity they charge rip off %’s of funds p.a. instead of a flat fee per year. Haven’t ever met one I liked.

Ah Baldrich, I have an idea! What can this Patrick (Cairns) mean “align themselves with a philosophy”. And yes, most of the commentators have it wrong. No, you don’t need a team of thousands analysing the various securities to come out with a brilliant and winning solution. Investors on this website, for the most part seem to think that choosing stocks is what they should be doing. Looking for that value. They shouldn’t be. They should be reading the news and CHOOSING INDICES that suit their approach from what they have read in the news. The problem is websites like Moneyweb, which reports on stocks, and not on INDICES, economies, and systemic risk. The whole idea of having a portfolio is to average out the specific risks of individual stocks. This means picking an index if you are anything less than a billionaire, and finding a fund that tracks that index. Often an index will reflect a geographic market, or a basket of market types like emerging markets, or a sector of the economy like utilities. News will give the investor a feel for the risks associated with their chosen index. This is passive investing surely. Although you still have control which direction your money should go.

Hi Patrick, what period are you looking at for lowest max drawdowns? I find other funds with lower max drawdowns over 5 years (using Oct and Nov) on Morningstar?

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