"PAST performance is no guarantee of future returns." These words any investor — individual or institutional — will see on fund fact sheets or other literature produced by fund managers, writes Johann Barnard.
This prudent cautionary notice is not only a regulatory requirement but also an indication of the market swings fund managers have to navigate. While the warning is equally applicable to active and passive funds, selective data shows that the need for caution in actively managed funds is greater.
According to the S&P Indices Versus Active (Spiva) SA Scorecard for 2015, active managers have consistently underperformed S&P benchmark indices over the past five years. And the longer the time frame, the worse their performance.
According to the report, which was released at the beginning of April, global equity-focused funds showed the worst performance (as measured against the S&P global 1200 index) over the five-, three-and one-year periods. The returns, that showed that 96%, 81% and 75% of fund managers were outperformed by the index for the periods, is due partially to not only stock and country selection but also management of the decline of the rand.
Local equity funds performed a little better — compared to the S&P South Africa Domestic Shareholder Weighted Index — with 75%, 63% and 51% of active funds producing lower returns over the five-, three-and one-year periods.
Zack Bezuidenhoudt, head of S&P for SA and sub-Saharan Africa, says this result should not be surprising. "Most active fund managers will underperform the benchmark after fees most of the time, with our data showing this figure to be about 80% over a five-year period," he says. "While some active managers are able to pick those stocks that outperform the market, a small number of managers are able to do this consistently."
This holds true for fund managers across the globe, not only locally. Bezuidenhoudt says S&P has data for the past 15 years for US funds that bear this out. S&P Dow Jones Indices publish eight Spiva scorecards covering Australia, Canada, Europe, India, Japan, Latin America, SA and the US.
He says South African managers face a multitude of challenges brought on by the weakening currency, market volatility and the impact of the commodity price crisis.
"Active managers aim to pick those stocks that outperform the market. The problem is that it is difficult to do that in a period where certain stocks are performing similarly to each other," he says. "And the problem facing the big asset managers is that they can’t invest in small and mid-cap companies, which are showing a long-term momentum trend. When the rand went through a difficult period last year, big fund managers that invested in large cap stocks with big global exposure, which provided a rand hedge, did well. But given the long-term momentum trend in small caps, the large managers have been struggling, especially in the first four months of this year."
Rankings such as this should, however, be taken with a pinch of salt, argues Pieter Koekemoer, head of personal investments at Coronation.
"The purpose of these reports is to promote a specific way of investing. If you want to track index compilers you have to pay them a fee, so there is a strong motivation for the index providers to trumpet any results that show that the average active manager underperformed a certain index over a specific period. These return comparisons are not public service announcements — it’s pure marketing," he says.
"What is quite clear is that the market is governed by mathematical laws we can’t escape from.
"Not all market constituents, in aggregate, cannot receive above-market returns — active returns are generated at the expense of other market participants.
"The absurdity of this approach can be demonstrated by applying the same logic to an evaluation of past performance by passive funds. Over the past year, we had 10 passive unit trusts in the general equity category. The Alsi returned 3,2% for the year, while the maximum returned by a passive fund was 3,2%. The minimum return by a passive fund was -8,9% and the average return was -0,9%. "If you follow the logic, you should therefore not invest in a passive fund because 100% of them failed to outperform the index.
"Generalisation doesn’t help."