Few active equity funds beat the market last year

That’s according to the latest SPIVA scorecard, which compares the performance of actively managed funds against various indices. Mark Bechard reports

MOST actively managed

South African equity funds underperformed the market last year, according to the latest S&P Indices Versus Active (SPIVA) scorecard.

The SPIVA, compiled by S&P Dow Jones Indices, measures the performance of actively managed, rand-denominated South African equity and fixedincome funds against various benchmark indices over one-, three- and five-year investment periods.

South African equity markets surged in the second half of last year, to produce a return of 22.6%, as measured by the

S&P South Africa Domestic Shareholder Weighted (DSW) Index. However, only 4.08% of investors in active South African equity funds earned a return that beat this index.

The SPIVA also compared how local equity funds performed against a capped version of the S&P South Africa DSW. This is regarded as a more realistic benchmark, because, in order to avoid concentration risk, fund managers will limit a fund’s exposure to a single share. As the “Rands & Sense” column on the facing page points out, one share, Naspers, which has the biggest weighting of 21.5% in the S&P South Africa DSW, has driven returns in the local equity market over the past few years. But it is unlikely that an active fund manager would have had this level of exposure to the share.

The S&P South Africa DSW Capped Index, which limits the weight of any share to 10% of the index, returned 15.64% to the end of December. However, only 25.51% of actively managed domestic equity funds were able to beat this index.

S&P says the big upturn in local equity markets from the middle of last year was the result of the 25-basis-point cut in interest rates in July, and the hopes towards the end the year that the change in the country’s political leadership would result in better economic growth. S&P says fund managers’ underperformance of the benchmark indices may indicate they were not well positioned to take advantage of these developments. This seems to be borne out by the SPIVA’s statistics for the six months to the end of June last year. At that time, 44.97% of actively managed equity funds had beaten the S&P South Africa DSW Index. (A comparison for the capped index is not available, because it had not be introduced at that time.)

As Table 1 shows, most actively managed local equity funds also failed to beat either the capped or uncapped S&P indices over three or five years.

Table 2 shows the average returns of South African funds compared with the benchmark indices over one, three and five years. On average, the returns from equity funds did not beat the capped or uncapped indices over the three performance periods, although the underperformance was less marked when fund returns were asset-weighted.

When it comes to SouthAfrican-domiciled funds that invest in global equities, 32.73% outperformed the S&P Global 1200 Index over one year. The percentage of funds that beat the index dropped significantly over the three- and five-year periods to 11.11% and 7.14%, respectively.

However, the results were more encouraging when it comes to the performance of actively managed fixed-income funds that invest in bonds. Most short-term bond funds out-performed the index over all three measurement periods, while actively managed diversified bond funds outperformed the index over three and five years.