Figures from Morningstar show that for the 10 years to the end of March, South Africa’s best-performing local general equity fund returned 15.63% per annum. At the other end of the scale, the worst performer returned 6.48%.
Put another way, given that inflation averaged just under 6% for this period, investors in the top-performing fund saw an annualised real return (above inflation) of close to 10%. Those in the poorest performing fund saw their real worth grow at less than 1% per year.
This is an enormous disparity. As the table below shows, R1 million invested in these two funds 10 years ago would have produced vastly different results.
|Growth of R1 million over 10 years|
|Annualised growth||Final total|
|Top performing equity fund||15.63%||R4.73 million|
|Worst performing equity fund||6.48%||R1.91 million|
Over five years the contrast between the best and worst performers is even more stark. For this period the range is from 9.15% in the leading unit trust to -2.71% in the weakest.
|Growth of R1 million over 5 years|
|Annualised growth||Final total|
|Top performing equity fund||9.15%||R1.58 million|
|Worst performing equity fund||-2.71%||R855 066|
It is not, however, just the range between these two extremes that investors should consider. It is also worth looking at what happened in the middle.
Over 10 years, the total range between the best and worst performing funds was 9.15%. Yet 50% of unit trusts in this category delivered returns within 2.57% of each other, and within less than 1.4% of the category median.
This means there is a concentration of funds that perform around the average. This is illustrated in the table below.
|SA equity general fund performance over 10 years|
A similar pattern emerges over the past five years. Over this period, 50% of funds fall within 2.51% of each other, and 1.5% of the median.
|SA equity general fund performance over 5 years|
An animated graphic produced by Corion Capital – Equity fund outcomes over the last five years – shows that this holds true through time. The analysis covers the five-year period to the end of February 2019 and shows that the range of performance between funds in the middle two quartiles remains narrow throughout.
This is probably not particularly remarkable. When plotted on a chart, the distribution of returns would reflect a standard bell curve.
What is notable, however, is that the distribution does not fall around the market return. It is actually significantly below it.
What is average?
That much is clearly evident from the fact that all of the funds in the two middle quartiles have underperformed not only the FTSE/JSE All Share Index, but the index-tracking fund with the longest track record. As the table below shows, the Gryphon All Share Tracker Fund sits in the top quartile of performers over both five and 10 years.
|Performance of Gryphon All Share Tracker Fund|
|Fund||Rank||Category mean||Category median|
This clearly contradicts the ill-informed view that index trackers deliver an ‘average return’. Over both five and 10 years the Gryphon All Share Tracker Fund outperformed the category average by around 2%. So if the index is considered ‘average’, then the average fund manager is decidedly below average.
It also highlights another problem, which is that many managers in South Africa use the category average as their benchmark. In other words, they are not trying to outperform the market. They are only aiming to beat their peers.
As this analysis shows, that means they are targeting below-market returns. This is a questionable approach when investors have had the option of investing in an index tracker that will, more or less, deliver performance in line with the market.
What should active managers be aiming for?
It is worth noting that of the 11 funds that outperformed the Gryphon All Share Index Tracker over the past 10 years, only one uses the category average as its benchmark. The others all measure themselves against an index, or a combination of indices.
There are of course arguments as to why JSE indices do not make good benchmarks. Mostly these have to do with how concentrated the local market is, and the impact that just a few stocks have on its performance.
However, there are ways to mitigate that. For example, a number of managers have moved to using a capped index, which limits the weighting of a single stock to 10%.
More pertinent, however, is that the market is what it is. It will never be perfect. It will always have its idiosyncrasies that managers have to navigate.
That is, however, what investors are paying them to do. There are obviously some very good managers in South Africa who have done this successfully. Regardless of how the market is made up or how it has performed, they have delivered value to investors by outperforming it.
That should be what any active manager aims to do. And it’s hard to see why any investor should be satisfied to settle for anything less when the market return is available to them through an index tracker.