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SA active managers continue to underperform their benchmark index, finds survey

Anna Lyudvig
April 25, 2018, 5:26 p.m.
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Latest data from the end-March 2018 Quarterly Collective Investment Schemes Performance Survey, shows that, on average, 80% or more of general equity unit trusts and other collective investment schemes (ETFs) in South Africa, fail to produce total investment returns above the FTSE/JSE All Share Index.

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Latest data from the end-March 2018 Quarterly Collective Investment Schemes Performance Survey, shows that, on average, 80% or more of general equity unit trusts and other collective investment schemes (ETFs) in South Africa, fail to produce total investment returns above the FTSE/JSE All Share Index.

According to etfSA, of the funds that did outperform the index, increasingly such index beating returns were produced by index tracking products, rather than typical active stock selecting asset managers.

Mike Brown, Managing Director, etfSA.co.za, said: “For periods ranging from 1 to 10 years,80% plus of the actively managed general equity collective investment schemes, that make up the Survey, failed to produce returns in excess of the total returns of the JSE All Share Index.”

“The number of collective investment funds that are included in the general equity sector of the Survey, range from 66 funds on 10 years to 165 funds for the one-year period. In other words, the sample is very representative.:

The numbers show a remarkable consistency in that less than 20% of the active managers in the Survey can outperform their representative benchmark index over the various time periods surveyed, from 1 to 10 years.

“The one exception is the 10-year performance survey, which indicates that 71,2% of active managers underperformed the index (i.e. 28,8% managed to produce outperformance). However, as the period surveyed increases in duration, the issue of “survivorship” enters into consideration. Over a 10-year period, some 50% or so of collective investment schemes that have not been successful will close, or merge with other funds. So, the “survivorship bias” tends to distort the picture, the longer the time period surveyed,” Brown said.

“The irrefutable conclusion remains, however, that the majority of active collective investment schemes do not deliver alpha investment returns, i.e. in excess of index-based returns,” he added.

According to the results, for the periods of 1 year and 3 years, a significant portion of the collective investment schemes that produced investment returns in excess of the index, were index tracking funds, either ETFs or unit trusts. 

As the number of index tracking products that are available for periods of 5 years or longer is limited, this statistical survey has been confined to 1 and 3 year periods.

The numbers indicate that a significant portion – 12 out of 29 funds for one year and 8 out of 16 funds for the 3 year period, that produce All Share index beating investment returns – are in fact index tracking funds.

“This is a somewhat surprising result as you would expect an index tracking fund to provide market average performance – the index, of course, is the average of the market returns,” Brown said.

Top three index tracking funds that outperform the FTSE/JSE All Share Index for one year are Satrix Quality Index, Satrix DIVI Plus Portfolio and Sygnia Dividend Index; and for three years are Satrix RAFI 40 Total Return, Satrix RAFI 40 Index and Old Mutual RAFI 40 Index.

Brown said that although the Quarterly Performance Survey includes many index tracking funds under the general equity classification sector of the Survey, these products often track indices that differ from the All Share index.

“The majority of index outperforming tracker funds are in fact “smart beta” products, where the objective is to track factor based indices, which look to specifically provide market beating returns or to reduce risk through specific focus on smart indices. Such indices do not replicate market capitalisation weighted returns, but look to take into account specific investment factors, such as volatility, value, momentum, etc,” he said.

“The more successful smart beta products for the relatively short time periods surveyed (1-3 years) have been using dividends, momentum or value as the target for stock selection rather than risk containment factors,” he added.

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