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Most active equity managers continue to lag the index

Latest SPIVA report shows that over 80% of local equity funds trail a broad market benchmark over five years.

Over the 12 months to the end of June this year, the South African equity market was very depressed. The S&P South Africa Domestic Shareholder Weighted (DSW) Index was 0.1% down over this period.

This was a difficult environment in which to be a fund manager, but at the same time it was one in which active strategies should have been able to prove their value. In a market going sideways, one would hope that good stock pickers would be able to extract something for their clients above what the index was offering.

To some extent, this did play out in South Africa. The latest S&P Indices Versus Active (SPIVA) Scorecard released on Tuesday shows that 44.97% of local active managers beat the S&P benchmark over this one year period. This was a significant improvement from just 27.53% for the 12 months to the end of December 2016.

However, that does still mean that the majority of managers underperformed. Overall, 55.03% of managers produced returns below the benchmark.

As the table below indicates, this also increases substantially over longer periods. Over both three and five years, more than four fifths of active managers lag the index.

Percentage of South African funds outperformed by the benchmark to June 30 2016

Fund category

Benchmark

1 year %

3 year %

5 year %

South African Equity

S&P South Africa DSW Index

55.03%

82.80%

83.72%

Source: S&P Dow Jones Indices

The numbers are also very similar for local fund managers running global equity funds.

Percentage of South African funds outperformed by the benchmark to June 30 2016

Fund category

Benchmark

1 year %

3 year %

5 year %

Global Equity

S&P Global 1200 Index

54.90%

80.65%

89.29%

Source: S&P Dow Jones Indices

This shows how challenging it has been for active managers to outperform over this period. It also indicates how difficult it is for investors to pick one that will. If only 16.38% of active fund managers beat the index over five years, that leaves very little margin for error.

This is also apparent when comparing the average equity fund performance against the respective benchmarks:

Average South African equity fund performance

Category

1 year %

3 year % (annualised)

5 year % (annualised)

S&P South Africa DSW Index

-0.10%

5.05%

12.97%

South African Equity

-0.85%

2.26%

10.17%

Source: S&P Dow Jones Indices

Average global equity fund performance

Category

1 year %

3 year % (annualised)

5 year % (annualised)

S&P Global 1200 Index

6.80%

13.57%

22.92%

Global Equity

6.05%

9.51%

18.77%

Source: S&P Dow Jones Indices

These figures do however improve significantly on an asset-weighted average. In other words, the average larger fund performed better than the average small fund.

This doesn’t mean that smaller funds can’t or didn’t outperform. A number of them did. What it shows is that investors without in-depth knowledge or expertise are better off choosing a larger fund.

Average South African equity fund performance (asset-weighted)

Category

1 year %

3 year % (annualised)

5 year % (annualised)

S&P South Africa DSW Index

-0.10%

5.05%

12.97%

South African Equity

0.58%

3.06%

11.10%

Source: S&P Dow Jones Indices

Average Global Equity Fund Performance (asset-weighted)

Category

1 year %

3 year % (annualised)

5 year % (annualised)

S&P Global 1200 Index

6.80%

13.57%

22.92%

Global Equity

8.69%

11.74%

22.20%

Source: S&P Dow Jones Indices

While the overall picture for equity fund managers is not great, it is completely different for bond managers. In this space, a comfortable majority of active managers outperform.

Percentage of South African funds outperformed by the benchmark to June 30 2016

Fund category

Benchmark

1 year %

3 year %

5 year %

Short-term Bond

STeFI Composite

11.11%

18.60%

14.29%

Diversified Bond

JSE/ASSA Albi

32.63%

34.62%

30.51%

Source: S&P Dow Jones Indices

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Sure, but looking forward now, given the current levels of global markets and the US cycle of interest rates, I still would rather go with a good stock picker.

The past 5 years + were ideal scenario for index. This won’t continue forever

So the past 3 flat years (it’s included in the 5+ years you mentioned) on the JSE were an ideal scenario for index funds? Obviously growth years are good for index funds too. So are only down years good for managed funds?

Yes, past experience shows that the GOOD fund managers outperform the Index in Bear markets. Nothing new here!?

And the bear markets last how long generally? It’s not like it’s 50% of the time…

Passive index trackers are outperforming active managers due to it’s 20% weight in one single company, Naspers. Active managers normally don’t have such a large weight in one company, because this reduces the benefits of diversification.

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