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Local active managers delivered value in 2019

A majority out-performed the S&P benchmark last year
Image: Shutterstock

It may be hard to remember in the current market turmoil, but 2019 was not a bad year for South African stocks. The FTSE/JSE All Share Index was up 12.0%.

It was also a pretty good year for active managers. According to the latest S&P Indices vs Active (SPIVA) scorecard, 55.94% of South African active equity funds out-performed the S&P South Africa Domestic Shareholder Weighted (DWS) Capped Index over the 12 months to 31 December 2019.

This is the second consecutive year in which a majority of active funds have beaten this benchmark. In 2018, 61.42% of active managers out-performed.

Read: Local active managers outperformed in 2018

It is also the second year in a row in which the average active fund has delivered an above-benchmark return. As the table below shows, most active strategies have been able to deliver value since the end of 2017, although this was true for the three years prior to that.

Average SA fund performance
Category 2015 2016 2017 2018 2019
S&P South Africa DSW Index 3.04% 5.05% 22.61% -11.38%
S&P South Africa DSW Capped Index 15.64% -10.79% 7.23%
South Africa Equity (equal weighted) 2.11% 3.36% 12.07% -8.86% 8.05%
South Africa Equity (asset weighted) 2.86% 5.06% 13.74% -9.10% 9.44%

Source: S&P Dow Jones Indices

Over longer periods, however, a majority of active funds continue to lag the benchmark. As the table below shows, the number of active managers outperforming the S&P South Africa DSW Capped Index over three and five years declines as the measurement period is extended to three and five years.

It is also worth noting that less than a tenth of local active managers managed to beat the large cap S&P South Africa Top 50 Index over these longer periods. This shows how the larger stocks on the JSE have been far stronger than mid and small caps.

Percentage of SA equity funds that out-performed benchmarks
Category 1 year 3 years 5 years
S&P South Africa DSW Capped Index 55.96% 46.70% 38.99%
S&P South Africa Top 50 Index 31.61% 6.09% 6.92%

Source: S&P Dow Jones Indices

“The large-cap benchmark, the S&P South Africa 50, was up 10.4% in 2019,” S&P Dow Jones noted. “It outperformed the S&P South Africa DSW Capped Index by over 3% annualized over each of the one-, three-, and five-year periods, demonstrating the tendency of the largest 50 stocks to outperform in recent years.”

Going global

Last year was also a particularly good year for South Africans invested in funds exposed to international stocks. The average global equity fund returned over 20% in rand terms.

As the table below shows, however, this was well below the return of the S&P Global 1200 Index. The average active global equity manager has under-performed this benchmark over all time periods.

Average global equity fund performance (annualised)
Category 1 year 3 years 5 years
S&P Global 1200 Index 24.74% 14.21% 13.73%
Global Equity (equal weighted) 21.15% 10.27% 9.57%
Global Equity (asset weighted) 21.76% 11.14% 11.24%

Source: S&P Dow Jones Indices

In general, active South African global equity funds have a poor record against the S&P benchmark. Only a little more than a quarter out-performed the index in 2019, and barely 5% have done so over a five year period.

Percentage of global equity funds that out-perform the benchmark
Category 1 year 3 years 5 years
S&P Global 1200 Index 26.56% 14.81% 5.41%

Source: S&P Dow Jones Indices

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Seems kind of pointless now, comparing any performance within a few percent, when all those portfolios crashed by ~30%

I wonder how much the active managers have protected their fund during the crash, that’s one of the positive spins on active management isn’t it?

What would be interesting would be to compare these active managers performance over 1,3 &5 years in USD vs the S&P500 after fees. And then this years performance also in USD to the same benchmark.

This will give a clearer and more useful picture of if having some offshore exposure is valuable and warranted or not.

All asset managers say”now is the time to buy”. How many told clients before this crash “now is the time to get out”. There is also plenty survivorship bias and consolidation of under forming funds that is under reported. No fund manager is going to admit that they add little value to their clients.

How do you market your products or services i.e. do you prospective clients not to buy? ? It is basically better to be investing, irrespective of the current cycle, than sitting on the sidelines. There is an element survivorship bias in every industry – unsuccessful or bored lawyers, accountants etc. leave their industries – but easier to quantify in investing, so what, just work with adjusted figures/averages. Most people who think successful long-term investing is easy get carried out on a stretcher. Are you one of them?

One sparrow doesn’t make a summer.

Fund Managers should be measured over a full market cycle.. a bull with a bear.

The very last table is telling : one in 20 global equity funds beat the global 1200 index over 5 years. Reason? Compound fees is the ugly cousin of compound earnings.

What to do? If you have a longterm horizon:
A. If you are investing on recurring basis, buy the index every month directly. You can get 0.02% fee trackers.
B. If you have a cash pile to invest, do your own homework and AFTER that invest in a dozen Champions directly and trade them infrequently maybe exit one per year, enter in per year to stay sharp and involved.

End of comments.

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