Beware of the spruiking by active fund managers
It seems there is always a time in share markets when active fund managers start to spruik the fact that the market is turning to their favour.
If they are to be believed, there are periods of time when a passive exposure to a market such as the ASX 200 through an exchange traded fund is hard to outperform while there are periods in which active managers come into their own.
I actually do believe there are market segments such as small companies and maximising franked dividend income where good active managers are worth investing through but when it comes to the big market indexes like the ASX 200 and the S&P 500, the numbers favour the passive investors quite strongly.
SPIVA shows how rarely active managers outperform
One valuable research tool which looks at the relative success of active fund managers, is the S&P indices versus active (“SPIVA”) report.
Over many years this report has shown that relatively few active fund managers are able to outperform passive managers as measured by the big indices.
Take the latest report which covers up to the end of calendar 2023, which showed that more than 75% of all Australian large-cap equity fund managers underperformed the ASX200 benchmark for 2023.
That is despite a lot of claims that stock pickers would have “their year” in 2023 due to ongoing high volatility due to changing interest rate and inflation data.
Common predictions fail to eventuate
Most of those claims centred on the chances that 2023 would produce a US recession and poor investment market returns as interest rates soared upwards from close to zero.
Those predictions turned out to be a long way from what happened, with economic growth remaining strong and global share market measures rising 23% for the year – helping those who maintained exposure to markets, whether passive or active.
Part of the report also looks at the consistency of fund manager performance over consecutive years, which, as expected, shows that active managers very rarely outperform market indices over a longer period of time when there might be a range of different economic conditions.
That’s not to say there are no fund managers that consistently outperform the market – Warren Buffett is one such rarity – even though he is not strictly a fund manager but rather manages investment company Berkshire Hathaway.
It is just that finding and sticking with good active fund managers through thick and thin is a really difficult task, one that is very much akin to identifying individual company shares that will outperform the rest of the market.
May be better to concentrate on asset allocation
Instead of trying to find the elusive “gun” active manager, it is probably more productive to use passive ETFs to get access to various markets and instead put the effort into allocating assets.
For example, for the past couple of years, investors would have got better returns with a heavier exposure to US market through S&P500 or Nasdaq ETFs, although, arguably they should now be “rebalancing” their asset allocation by selling down part of their investment in these markets and increasing the allocation to markets such as Australia’s that have performed in a more sedate way.
Patience over the long term pays off
Patience is the other key, given that over time there are far more positive return days than negative ones, making a long-term strategy hard to beat.
S&P Global’s semi-annual scorecard rating the performance of Australia’s active managers showed a similar picture with more than half of Australian active equity fund managers failing to beat the market in the first six months of the last year, with global equity funds and real estate investment trust funds doing particularly badly.
Small and mid-cap managers and bond funds did better, with just over half of funds tracked by S&P beating their benchmarks.
When the figures are stretched out to find out if any Australian active managers beat the market over five, ten and 15 years, more than four-fifths of managers failed to beat a passive ETF.
Global equity funds offered in Australia did particularly poorly compared to the index, with just one in ten funds managing to beat S&P’s developed market benchmark over five, ten and fifteen years.