Behind active management
Most active fund managers won’t beat the returns of passive funds. What matters is investing now rather than wasting time to find a great manager
An investor who wants to invest in the JSE via an investment fund has two main options: using an active fund-management company, usually in the form of a unit trust, or what is commonly known as a passive fund. These are usually exchangetraded funds or unit trust tracker funds. A passive fund simply tracks the average return of the market. It does this by tracking specific indices such as the FTSE/JSE All-Share Index or the JSE Top 40. Exposure to shares in that index is usually based on the size of the company, with a higher weighting to larger companies. You can never hope to outperform the market in this type of fund, and should receive a return slightly less than the average return after fees have been deducted.
An actively managed fund, run by big household names such as Allan Gray, Investec or Coronation for example, employs professional portfolio managers who spend their days researching all the companies on the JSE and deciding which companies make for the best investments. For this service, they charge a management fee and often a performance fee over and above that. As a result, they are more expensive than passive funds.
The idea is that, with this skill, they will be able to deliver returns in excess of the average return from the stock market, thereby justifying their fees.
The problem is that research is indicating that active fund managers are not delivering on their promises despite, or perhaps because of, their fees.
Research conducted by the S&P Dow Jones Indices found that, last year, 84% of South Africa’s actively managed investment funds underperformed their benchmarks, which are usually a specified index.
The Spiva SA Scorecard was launched by the S&P Dow Jones Indices to measure the performance of actively managed South African funds against their respective benchmark indices over one-, three- and five-year periods.
The results raise questions about whether investors are getting their money’s worth by spending money on expensive active management.
As much as 84% underperformed their benchmark last year and, over a five-year period, it was slightly worse: 85% of domestic equity funds underperformed and 97% of global funds trailed their respective benchmarks.
Figures from investment-analysis company Morningstar Direct showed that even when fees were removed, 74% of South African active fund managers underperformed the index over a 10-year period. This means that even if they were charging you no fees, they still did not match the performance of the FTSE/JSE All-Share Index. They were clearly making bad investment decisions.
Investec Opportpnity Fpna
StanliR Balancea Symmetry
Oasis Balancea Average fpna performance Element FlexiRle
(Fraters) the best funds in their category based on the awards.
Ten years later, the RMB High Tide Fund no longer existed and the Oasis Balanced Fund and Fraters Flexible (now Element Flexible) underperformed the average of all the funds in its category.
The Satrix Balanced Fund is in effect a balanced index tracker and would represent a good benchmark for actively managed funds. As the Satrix Balanced Fund was not open in 2005, simulating the index provides insight into how such a passive investment would have compared. When doing this, it’s clear the Satrix Balanced Fund would have outperformed the award-winning active funds.
Of all the funds awarded a Raging Bull in 2005, the Investec Opportunities Fund performed best, and four of the funds did continue to perform above the average of other fund managers, although not the simulated Satrix fund. The Satrix Balanced Fund outperformed all the award-winning active funds, although the point must be made that this was a simulated index and may not have used the same regulatory constraints that were applicable to the funds against which it is compared.