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.

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­week.co.za

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.

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