Over the five years to the end of June this year, 74.19% of active South African equity funds underperformed the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index, according to the latest S&P Indices Versus Active (Spiva) scorecard. In other words, only a quarter of fund managers delivered an above-market return.
On an asset-weighted basis, the average annualised return investors in South African equity funds saw over this period was 3.57%. The S&P South Africa DSW Capped Index was, however, up 4.28% per year over the same time. This means that the average investor in an actively managed South African equity unit trust underperformed the market by 0.71% per year.
When looking at only the past three years, active managers have fared slightly better. Only 52.91% have underperformed the S&P benchmark, and their asset-weighted average performance has been higher.
It is fair to say that this has been a difficult period for local managers, given that the local market has generally been weak, with periods of performance coming from isolated sectors. However, the recently published Spiva scorecard for Europe shows that active managers in that region have fared no better.
For the five years to the end of June 2019, 77.53% of European equity fund managers underperformed the S&P Europe 350 Index. The asset-weighted average return for European equity funds was also 0.79% below the index.
This is therefore not a phenomenon specific to the South African market.
It’s also worth considering that local managers managing global equity funds have fared even less well. As the table above shows, just 3.12% of South African-domiciled global equity funds outperformed the S&P Global 1200. In a universe of 34 funds, that represents a single manager.
A fair comparison?
Some active managers have criticised the Spiva scorecard on the basis that no local funds actually benchmark themselves against these S&P indices. This is however a moot point, because when compared against their own benchmarks, active funds do not fare any better.
The S&P South Africa DSW Capped Index is also a pretty good representation of the investible market on the JSE. By capping the weighting of individual stocks at 10% and adjusting for the percentage of the market capitalisation held by South African investors, it is a fair reflection of the opportunity set for active managers.
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The reality is that most active fund managers struggle to add value, where value is defined as outperforming a broad market benchmark. That has become glaringly apparent as the data from Spiva and similar studies over many years continues to produce consistent findings, not just in South Africa, but across the world.
The investors’ dilemma
For investors, this highlights the challenge in selecting an active fund manager. Over all time periods, in all markets, more than half of active equity funds underperform a broad market benchmark.
In South Africa, the Spiva figures suggest that only 42 out of 162 funds have delivered outperformance over the past five years.
There are therefore managers who add value, but it’s not easy for investors to identify who might be among this minority beforehand.
To illustrate this, consider that the five top-performing active South African equity unit trusts over the past five years have been the Fairtree Equity Prescient, Investec Value, Autus Prime Equity, Aylett Equity Prescient and 36One BCI Equity funds.
Five years ago, these portfolios had a combined market share among South African general equity funds of 3.4%. From those figures, it’s obvious that they were not being widely recognised as the future outperformers.
Given this challenge, investors need to be clear on how and why they use actively managed funds in their portfolios. The reality is that active does offer the potential for outperformance, but also the risk of underperformance. Since they cannot be certain of what they will get beforehand, investors have to be willing to accept either outcome.