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How active SA managers stack up against the industry they’re benchmarked against

‘The longer a time period, the worse the performance tends to be for active managers’: Len Jordaan, S&P Dow Jones Global.

SIMON BROWN: I’m chatting with Len Jordaan. He’s director and head of South Africa and sub-Saharan Africa Sales at S&P Dow Jones Global. Len, I appreciate your time today. We are chatting Spiva, which is the Standard & Poor’s Indices versus Active [scorecards]; in essence, S&P do this on a global scale. You’ve just published a South African one. This is really looking at the active managers versus the sort of passive strategy and in a sense, I suppose, to call it what it is, we are marking the one side versus the other.

LEN JORDAAN: I suppose we can see it that way, Simon. Everyone knows the academic research behind why it’s so difficult to outperform indices. And what S&P wanted to do globally was … a hypothesis and see how active managers do stack up against the industry that they’re benchmarked against. Obviously, South Africa is relatively new, and we’ve been doing this globally for quite a long time. Probably for the last 10 or 12 years, we’ve been doing it for South Africa, so we are building a recent decent-sized database. Certainly, the numbers that we’re getting in South Africa stack up very consistently with what we see overseas.

SIMON BROWN: You do it over a couple of time frames. But the short answer is that, particularly over the short period, the one-year numbers for the active were okay; but as soon as you start to push that out, the active numbers significantly fall off over five years and, over the S&P SA 50 Index, 93.5% of active managers get beaten by the index.

LEN JORDAAN: That’s right. The longer a time period, the worse the performance tends to be for active managers. And I think that’s down to the fact that active managers rely on specific styles to outperform the market. So they have as the hypothesis what type of shares will outperform the market at any points in time. But it’s very difficult to predict which style is going to be performing well going forward and to outperform consistently you would have to know which style is going to outperform the market every year. That becomes a very difficult thing to do and it would drive some form of foresight.

And typically, if you blend all of those themes together, you’re going to get an outcome that’s a winner over longer periods of time. So we did see some active managers outperforming over short periods of time. We do see very strong thematic styles outperforming, but over longer periods of time, it just becomes impossible to predict which is going to outperform.

SIMON BROWN: That’s always our challenge – which is it going to be? The one thing I did notice is you’ve also got the S&P South Africa DSW Capped Index, in which case versus a capped index, the active managers do better; over five years it’s only 40% who beat the index, 60% don’t. But certainly, that shows the issue of some of those heavyweights in our market as predominantly the Naspers/Prosus/Tencent troika, in a sense.

LEN JORDAAN: Yes. What we wanted to do is to construct an index that was relevant and appropriate for South African institutional investors, and we felt that 10% was probably the biggest weighting that a very large fund would take in any one stock. So we constructed the [S&P South Africa DSW Capped Index] and, as you say, active managers have done better against that than what they see in the [S&P South Africa 50]. I think it was also driven by the fact that over the last year large caps outperformed the small caps. South Africa has a very concentrated market and provided you are R10 billion or bigger, it’s actually very difficult for you to buy anything other than the top 60 shares in South African markets, because they will make up such a small percentage of your portfolio that, even if they do well, they aren’t going to influence your overall performance. So the top 50 was extremely difficult to outperform over the last year, just because the large caps did outperform the small caps – and that’s where all the liquidity tends to be.

SIMON BROWN: And the other point that you make, and we’ve kind of alluded to it already, is that even the funds in the 75th percentile – these are the top funds – struggle. It comes to the earlier point that picking the winner – (involving) which theme, which asset management house is going to actually outperform – is really, really tough. And, if you get it right once, you’ve now got to get it right a second, third, fourth, fifth time. You’ve got to constantly be moving out of one and moving into another.

LEN JORDAAN: That’s right. That introduces trading costs. Even if you can pick the managers that are going to outperform, it’s never good to go with one particular style at any point in time; you should always really be blended across different styles because these things are very difficult to predict. But then the cost of positioning your portfolio tends to eat away at your returns and that’s really the difficult part of investing.

We don’t use this report as a stick to beat active. It’s really just an illustration of how difficult it is to outperform indices, and what a tough job it is to be an active manager.

SIMON BROWN: Yes. The other one that you report – and I’m not sure if you’ve done this before, I know you did it in other markets and you did it over one, three, five and 10 years, and in South Africa, just one, three and five – is a survivorship bias wherein the South African equity space over five years a quarter of the funds essentially disappear. The sceptic in me is like if you’ve got a fund that’s not doing great, you kind of are probably going to close it down or fold it into another one.

LEN JORDAAN: Yes. We didn’t want that to skew the results. We wanted to take out that survivorship bias.

The other thing that we’re doing is we’re showing risk-adjusted returns because a lot of the arguments that active managers use on “Why active management?” is that they can manage risk. And the numbers improve a little bit when you look at the risk-adjusted returns, but not substantially so and certainly not enough to justify a few percent fees.

And then what we’re doing offshore currently, and we’re hoping to introduce it into South Africa in the near future to show persistency. So is it the same funds that are performing over the various time periods? I think that’s also going to be quite illustrative of how difficult it is to pick styles that consistently outperform over periods of time.

SIMON BROWN: That then, to the earlier point, is ultimately what we want. We want a fund, we can buy it, can come back in a decade – and it’s done good. Maybe not every year, but it’s done good more years than not. 

We’ll leave that there. Len Jordaan, director and head of South Africa sub-Saharan African Sales S&P Dow Jones Global. Len, I appreciate your time.

Listen to the rest of Thursday’s MoneywebNOW podcast here.

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