Investor’s Notebook: Active managers failing to live up to performance claims
It has always gone against the grain for me to acknowledge that managers who track indices passively do a better job of growing wealth than their active counterparts. But one has to concede that while there are exceptional active managers, as a group they are failing to live up to their claims of superior performance.
Passive investment champions etfSA, headed by MD Mike Brown, rub it in hard. In a note titled "The Extraordinary Outperformance of Index Tracking Exchange Traded Funds" (ETFs), etfSA points triumphantly to ETFs having at the end of March topped the lists of equity fund performers over the past one, three, five, seven and 10 years.
EtfSA trumpets: "What has happened to all the active asset managers, with all their fancy technology and marketing propaganda, who promise to outperform the index?"
It is a reality that active manager supreme Warren Buffett took to heart. He put it bluntly in a 1999 letter to Berkshire Hathaway shareholders: "Most investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals."
Somehow I suspect Buffett was steering investors in the direction of funds tracking broad indices such as the S&P500. With a plethora of passive funds now on offer, picking the winner is arguably as active an exercise as picking the best actively managed funds would be.
Even picking the winning fund over 10 years and seven years, the top 25 JSE industrial index tracker (Satrix Indi 25 ETF), required a very active decision to back industrials ahead of the likes of financials, resources, property and even the broad all share index.
Trickier still was picking the winner over five years and three years, the DBX Tracker MSCI USA ETF. Apart from having to have made a bearish call on the rand, it also demanded choosing between European, UK, Japanese and world equity ETFs.
It is even debatable which was the top-performing fund over three years. The DBX USA ETF turned in a total return of 114.8%, according to etfSA. The actively managed Old Mutual Global Equity Fund bettered this, returning 115.5%, according to Morningstar.
Picking the winning passive fund becomes vastly more complex when you add a new generation of "smart beta" funds into the mix.
It would be interesting to know Buffett’s thoughts on smart beta funds tweaked to outdo the vanilla indices. A now famous US$1m bet he took with a group of hedge fund managers that an index fund would outperform them over 10 years suggests he would not be impressed. Buffett bet on a simple index fund tracking US big-cap stocks. Eight years into the bet and his fund is still ahead.
Abri du Plessis, CE of very orthodox passive asset management firm Gryphon Asset Management, makes no bones about his view. He has no time for the smart beta brigade, slamming them as active managers in disguise.
Which brings me to the best-performing fund over the past 12 months: NewFunds S&P Givi SA Resource 15 ETF, a beta product combining low volatility and intrinsic value (which suggests an element of human judgment). It did a good job, returning 67% compared with the vanilla Satrix Resi 10 ETF’s -27%.
No doubt the active/passive debate will rage on. My take is that the average investor will be well served by owning a simple pure index tracker as a core portfolio holding and adding satellite active funds with consistent track records. They are out there to be had.