Actively managing your portfolio We look at how fund managers fared against benchmark indices in the recent past and how this information can inform your portfolio composition.
s&P Dow Jones Indices are not the major index players in South Africa. The JSE has tied up with FTSE for our local indices, with the third global player being the MSCI range of indices. That said, both MSCI and S&P Dow Jones Indices do have a local presence via a number of exchange-traded funds (ETFs) that use the underlying indices. Deustche Bank uses the MSCI for its offshore X-Trackers while Core Shares and Absa use some of the S&P Dow Jones Indices for their ETFs.
Yet, while their presence locally is small, S&P Dow Jones Indices do publish their S&P Indices Versus Active (SPIVA) research for the local market.
The SPIVA checks performance of local fund managers versus the relevant S&P Dow Jones Index to see how fund managers perform against the market, their benchmark. The index the SPIVA uses for the benchmark is the S&P South Africa Domestic Shareholder Weighted (DSW) Index, which is very similar to the local FTSE/JSE Swix Index – the Swix is an index many managers use to benchmark themselves.
So, with a comparison that is fair enough, the question is how well local fund managers do against this benchmark.
The simple answer is poorly. Over one year the index beat 50.6% of actively managed funds, over three years the index beat 63.4% of funds and over five years the benchmark beat 74.6%. Now, considering those five years in the minimum investment time horizon, one had a one in four chance of selecting the benchmarkbeating fund – not good odds.
Turning to local international actively managed funds, the results were even worse, with the index beating 75% over a year, 81.5% over three years and 96.4% over five years.
This tells us something we frankly already know; after costs we’re better off buying an ETF, especially if investing internationally. But, even on the local front, a simple lowcost index tracker wins and we are simply poorer if we go with the active managers.
Now the argument is that it is about picking the right active fund manager, and that is correct, but it comes with a big but… Do current top performing active fund managers continue to perform over the long term? The answer is seldom. I attended an Absa ETF presentation last June where they showed that only four funds managed to remain in the top 20 funds for two consecutive years.
There is perhaps an exception – small-cap funds. The local SPIVA data does not consider small-cap funds as there are too few of them. But the Australian data shows that less than a third of small cap active fund managers were being beaten by the benchmarks over the three time frames. This makes sense as the small-cap space is a lot more wild-west compared to the fairly staid and frankly overresearched large-cap space. With small caps there are a lot more stocks, with far more bad ones and some serious winners. Quality research and active fund management can identify the winners, avoid the losers and beat the benchmark.
So what should you do with this information? Focus on ETFs for the bulk of your portfolio, ignoring the promises of great returns from active managers. Even the stars today will at some time fade and cost you returns. Manage a small amount of your own money (as that’s also being active) with at least 50% in ETFs (ideally closer to 75%). Then, if you want some spice, buy a small-cap active fund for a small portion of your portfolio.
Quality research and active fund management can identify the winners, avoid the losers and beat the benchmark.