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Only a quarter of local equity managers beat the index

Latest Spiva scorecard should lead to some industry reflection.

Last year was not a very good one for the local equity market. The S&P South Africa Domestic Shareholder Weighted (DSW) Index was up just 5.05%.

This was not only below inflation, but also lower than the return one could have received from the money market. Even so, there were some parts of the JSE that produced exceptional returns, as value stocks came back into favour.

It was therefore the sort of year in which one would hope that active managers would be able to identify and exploit the opportunities that would deliver higher returns for investors. Some of them certainly did. The most exceptional example is the Investec Value Fund, which returned 62.37%.

Yet, even in this environment, 72.47% of South African equity managers failed to beat the S&P benchmark. In other words, only a little more than a quarter of active managers actually outperformed the market.

This is according to the latest S&P Indices Versus Active (Spiva) Scorecard for South Africa, which compares the performance of active managers against a broad market benchmark. The Spiva analysis has been produced for the US every year since 2002, and was introduced into South Africa last year.

As the table below shows, whether over one, three or five years, the majority of local managers are unable to beat the index.

Percentage of South African Funds Outperformed by Benchmarks

Fund category


1 year %

3 year %

5 year %

South African Equity

S&P South Africa DSW Index




Source: S&P Dow Jones Indices

 A comparison of the average South African equity fund performance against the benchmark tells a similar story:

Average South African Fund Performance


1 year %

3 year % (annualised)

5 year % (annualised)

S&P South Africa DSW Index




South African Equity




Source: S&P Dow Jones Indices

What is worth noting, however, is that if you asset weight the returns, this average does improve. In other words most investors would have seen a slightly better return as larger funds on average outperformed smaller ones.

Average South African Fund Performance (Asset Weighted)


1 year %

3 year % (annualised)

5 year % (annualised)

S&P South Africa DSW Index




South African Equity




Source: S&P Dow Jones Indices

The Spiva analysis is unique because it also corrects for survivorship bias. It takes into account the whole opportunity set at the start of the period, not only those funds that survived.

On the whole, this doesn’t make very good reading for active managers. Once again a study shows that the majority of them are not doing what they are essentially paid to do, which is to generate market-beating performance.

It is not, however, very useful to just leave it there. The industry as a whole really needs to do some self-inspection to ask why this is the case.

Firstly, it is becoming increasingly obvious that there are too many funds in South Africa. There is a very large tail of poor performers that add no value to anybody except the managers earning fees from them.

Of course the nature of the market is that there must be some funds that underperform for others to outperform. There have to be winners and losers. But when the ratios are so heavily skewed towards the losers, one has to ask why there are so many of them. 

The second question fund managers should be asking is whether they are truly offering something compelling. In a world where index tracking is becoming increasingly popular, are managers that build portfolios that look similar to the index really adding value?

Put another way, active managers need to show that they are truly active. That means that they must hold convictions that are different to the general market and their portfolios must reflect this.

 Thirdly, active managers need to continue to pay close to attention to the effect that costs are having on their performance. The Spiva scorecard shows fund performance after fees, but it would be interesting to know how many funds would have outperformed before some of that was paid away in expenses.

Managers cannot control what the market does, but they can control what their clients have to pay. They’re already under heavy scrutiny in this regard, but they will have to continue to manage this carefully.

 These are crucial considerations for the industry, and investors need to pay attention to how it addresses them. Because while the Spiva scorecard does show that most active managers are underperforming, it also shows that there is a fair chunk that do beat the market.

The larger industry should be asking what those managers are doing and how they are doing it. And so should investors.

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The major reason most people still invest with many of these under-performing asset managers is that their financial advisers hardly ever recommend passive index trackers as an investment option. I have yet to meet a financial adviser that hasn’t tried to sell me on some or other investment house, and when I point to the success of my passive, low fee investments, they shrug their shoulders and point to the other 27.5% of fund managers who beat the index, and sweep the hefty fees under the rug and into the fine print. Financial advisers will recommend products that they get the most commission on. Be wary of that and you’ll be better placed to make sound investment decisions.

100% of passive funds underperform the index they track. And by the way, please explain what the S&P South Africa DSW Index is i.e. what the constituents are, their weights, who uses this index, etc. This is certainly not a common index used in South Africa. The FTSE/JSE All Share Index returned 2.6% in 2016 and the FTSE/JSE SWIX Index returned 4.1% for 2016.

“100% of passive funds underperform the index they track”. 100% correct but …Yawn.

1st Place: The index and a handful of funds that beat the index.
2nd Place: The cheap passive index trackers.
3rd Place: The bulk of actively managed funds that don’t even get close to the index, layered in fees and bring misery to investors.

Very interesting to see active funds being put in a bad light against an unknown index with no mentioning of the composition of the S&P South Africa DSW Index.

Further as an active fund investor for over 25 years it’s interesting to see with the average holding time for funds being below 3 years how can one judge the performance out of own experience.

Also the bulk of the investments in equity happens to be in funds with long track records and it is the very same funds beating the passive funds. This means the bulk of the money does indeed beat the market.

Fees are merely a method of trying to forecast future returns. Those with market beating returns in the past shown they have the skills and will most probably continue doing so in the future.

As I have a numbers of funds for over 10 years and I just re-balance if a fund under performs the market it is easy to see why I stay in active funds at high fees. I just compare my funds and they all beat the market and thus my portfolio has been beating the market for over 20 years.

Why would I switch from market beating active funds into passive funds?

Lastly it seems all article writers will always compare active funds against the index instead of using a passive fund where the low fees can lower the index returns. Tracking error is real and need to be looked at.

And 100% of index trackers could not beat the index after costs were deducted!

Of course they shouldn’t beat the index, still you’d have done better than 70% of the managers. And you know what, if everyone went with the 30% that beat the index, the index would just become the median average of those 30% of managers, and by then investing in the cheap index fund you’d get the average of their performance, on the cheap.

ja no well fine – Any incidental return on a customers funds are purely by accident

I really wonder what the incentive is for the media to consistently beat the drum for passive investment. The next financial crisis will be the direct result of the current flow out of actively managed funds into passive funds. The reality remains that passive funds do not lead to proper price discovery/valuation of companies. It merely replicates the valuation that active managers place on a company. Less active managers = less accurate price discovery.

Simple maths will tell you that, yes, per definition 50% of fund managers will under-perform and 50% will under-perform – relative to the average performance. Using a little know benchmark that no fund manager in South Africa use is disingenuous.

Of course it’s a mathematical certainty that on average active investors underperform the index; and we can see from the numbers that not all active investors were included in the survey.

What about managers that outperform, is it due to luck or skill?

The large and increasing number of very bright people who spend their days trying to outperform each other, means that the markets are pretty efficient. When a sucker makes a mispricing mistake the gap is closed out fairly quickly. Also, news is digested and prices adjust fairly quickly. And then, the investment universe for large managers in South Africa is relatively small.

So, much of asset managers’ outperformance/underperformance relative to index follows a random walk.

Not great peformance by 75% of fund managers.

Hoever 25% beat the index which is better than index funds that cannot beat the index unless by accident. Costs ensure that.

Any other views?

Do you know how to pick the 25% of fund managers that will beat the index over the next 5 years?

But it’s not the same 25% each year so you have to identify which manager it going to be pre outperformance ……tricky 🙂

Not so tricky. Tricky if you want to forecast the top performer but most of the funds that did well over 5 years some 5 years ago are still beating the market and thus passive funds. Look at the likes of Coronation Top 20, Coronation Equity, Allan Gray Equity, PSG Equity, Momentum Best Blend Specialist equity, Imara MET.

Fees are a known while gr8 returns is not known yet but these funds will continue to beat the market and not what is sold to readers that funds that have done well are bound to drop to the bottom of the return list.

Luckily the bulk of the value happens to be invested in the top 25%. It is not time well spend to use averages of all funds as the numbers of bad funds are very high. As per trading it is the top few guys getting the cream from the majority loosing out.

The debate is healthy and necessary – no need for any animosity. Both passive & active professionals all know that a combination is the most appropriate – most of the noise is just based on marketing material.

Some obvious considerations: There are good & bad options in both active & passive. The investor of today is much better off: ample choice, cheaper & easier access and tighter regulatory protection than ever before. There is space for both active & passive and I would argue a combination of the two is more appropriate than either approach alone could ever be.

For context it’s important to understand:
1) only one asset class (equity) is being compared. The other asset classes aren’t yet ready for passive (but should be, in the future).
2) property has arguably the best future potential but the drastically changing index is currently inappropriate
3) Fixed income is not possible to track properly (please don’t waste time with the Albi argument, FI incorporates credit paper and more)
4) Money markets are safely beaten by decent active managers – selecting these managers isn’t rocket science
5) rebalancing between asset classes is an implicitly active decision – research suggests asset allocation has a larger driver on alpha (or negative alpha) – of course we must all be aware that “research” is always contextual research covers the entire market, it’s always an over-simplification with conditionality.
6) the passive alternative is the AVERAGE passive fund less BOTH the average fee and average tracking error (both market size weighted) – people would be amazed to see how bad some trackers are at doing their job of tracking.
7) Other considerations (over and above costs vs returns) need to be considered – such as risk adjusted returns. Managers like Allan Gray, for example, provide significant capital protection relative to the market during crashes.
8) active managers need to be size weighted lest we give some start-up the same weighting as the 60-strong teams you find at some of the larger managers
9) Private capital and alternate assets (everything from venture capital & private equity to direct physical interests and stockbroking) is all more appropriately covered by active. This may change, but unlikely in the near future.
10) Picking active managers and the market consequences of high passive are two further (necessary) debates which are perhaps too lengthy for here

Equity passive solutions really are excellent vehicles! and I believe they more appropriate for the average investor than active funds, if you don’t understand the managers/industry. But its critical to realise the debate doesn’t stop here, there is far more to an investors needs than equity exposure.

I’ve never heard of this index, where does it come from and what is it comprised of?

If you’re investing in an index or a mutual fund then a minimum of 5-year time horizon applies. So showing 1 and 3-year figures is largely irrelevant. Comparing performance on the short term shows a lack of understanding of investing in general.

Performance of both active and passive should be pitted against one another after fees.

Lastly, people will say how do you choose a fund which forms part of the 25% of funds which outperform? Well, a start would be to look at the long-term performance of the fund (7-10 year), if it outperforms the index then it is likely under good management and has a reasonable probability of continuing doing so.

wonder where Spiva sucked this quarter out of , it’s like figures put out by stat SA about the unemployment rate.
stephen nathan of 10X PUTS THE FIGURE BELOW 10% beating the index.
i could write a book about losses and b*****t stories of fund managers with their double talk.
do a quick 6 week course and you are a fund manager

10X will continue with the statement that only 10% can beat the market. It is their way of luring capital away from other managers. In fact 29% beat the index – that is a FACT over 5 years up to end April.

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