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Local active managers outperformed in 2018

But global managers struggled to add value.

Last year the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index was down 10.79%. The average South African equity fund, however, returned -8.86%.

This is the first time in the four years that S&P Dow Jones Indices has been running its S&P Indices Versus Active (Spiva) scorecard in South Africa that the average local active equity fund manager beat the index. It is also, notably, the first year that the market has been negative.

Average SA fund performance
Category 2015 2016 2017 2018
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%
South Africa Equity (equal weighted) 2.11% 3.36% 12.07% -8.86%
South Africa Equity (asset weighted) 2.86% 5.06% 13.74% -9.10%

Source: S&P Dow Jones Indices

Note: Spiva only began using the S&P South Africa DSW Capped Index for comparison from 2017.

An additional point of interest is that 2018 was also the first year in which the equal weighted average return of South African equity funds was higher than the asset-weighted average return. That means that smaller funds outperformed larger funds last year.

Without drawing definitive conclusions from a single one-year period, this table does suggest two things. The first is that negative markets offer the best opportunity for active managers to add value. This is not always the case, but by employing good risk management techniques they have a potential advantage when markets are down.

The second is that it is potentially more difficult for larger funds to protect capital. This may be because their investment universe is much more limited, and they do not have the same opportunity set as smaller funds. They are therefore more constrained in the strategies they can employ.

Beating the index

Overall, 61.42% of active managers outperformed the capped index. This is also the first time since the inception of the South African Spiva scorecard that this number has been higher than 50%.

Percentage of SA funds outperformed by benchmarks
Category 2015 2016 2017 2018
S&P South Africa DSW Index 50.63% 72.47% 95.92% 34.01%
S&P South Africa DSW Capped Index 74.49% 38.58%

Source: S&P Dow Jones Indices

Note: Spiva only began using the S&P South Africa DSW Capped Index for comparison from 2017.

Over the longer term, however, the significant majority of active equity funds have failed to beat the index. As the table below shows, less than a quarter of local active managers outperformed the DSW Capped Index over five years, and less than one in 10 have been able to deliver returns above the DSW Index over the same period.

Percentage of SA funds outperformed by benchmarks
Category 3 years 5 years
S&P South Africa DSW Index 84.66% 91.03%
S&P South Africa DSW Capped Index 69.89% 76.55%

Source: S&P Dow Jones Indices

The average return of active fund managers also falls below the index over these longer time frames.

Average SA fund performance (annualised)
Category 3 years 5 years
S&P South Africa DSW Index 4.51% 6.34%
S&P South Africa DSW Capped Index 3.11% 5.13%
South Africa Equity (equal weighted) 1.85% 3.62%
South Africa Equity (asset weighted) 2.85% 4.4%

Source: S&P Dow Jones Indices

Global funds

When comparing the performance of South African equity funds invested in global equities to a global index, the challenge that fund managers have had in adding value is even more stark. Over all time periods, less than 10% of active fund managers have outperformed the S&P Global 1200.

Percentage of SA funds outperformed by benchmarks
Category 1 year 3 years 5 years
S&P Global 1200 Index 90.77% 95.83% 92.86%

Source: S&P Dow Jones Indices

Comparing the average returns of these funds against the performance of the index further illustrates how difficult it has been for fund managers to outperform.

Average SA fund performance (annualised)
Category 1 year 3 years 5 years
S&P Global 1200 Index 6.59% 4.74% 12.16%
Global Equity (equal weighted) 1.11% 0.73% 7.65%
Global Equity (asset weighted) 0.34% 2.16% 9.17%

Source: S&P Dow Jones Indices

This is not only a South African phenomenon. The most recent Spiva scorecard for the US market delivered similar results. Only slightly more than 15% of global equity funds managed in the US have outperformed the S&P Global 1200 over five years, and less than 20% have done so over 10 years.

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So some surpassed the index in the past year.

How would the investor have known which to choose beforehand? How did they perform over the past 5 years?

I made 60% over the past 5 years. It wasn’t difficult. I just avoided fund managers and advisors.

Why would anyone choose to use a SA-based (local) active fund manager when it comes to investing globally?

Cost / price alone should put investors off, when you can have a S&P500 ETF for 0.04%pa or choose from a wide range of actively managed funds for <1%pa (OCF ongoing charges figure).

Compare those OCFs to “local” ETFs and locally managed global equity funds. And that’s even before you start talking about performance, resourcing etc

Patrick, be so kind to also indicate in your tables what % of Index funds outperformed the Index…apples to apples please

SPDJI doesn’t include index funds in its analysis, but it is a myth that index funds never out-perform the index. They can, and many do.

Indicate one that did?

Do you not have the ability to look it up on Morningstar or Fundsdata? This is simple analysis, something that is critical to do in checking any claim by SPDJI or anyone else. Or do you simply publish stuff verbatim withoud trying to check or add a little value?

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