Imagine a World Championship for fund managers. Which countries would come out on top?
Thanks to SPIVA — the annual Index Versus Active scorecard produced by S&P Dow Jones Indices — we can now chart the performance of active fund managers all around the globe.
As those who read our two-part interview with SPIVA supremo Craig Lazzara will know, the overall picture for active equity managers is grim. No more (and in many cases rather fewer) funds outperform their benchmarks than you would expect from random chance.
That said, there are some countries where active funds have had more success than others. Let’s be clear, nowhere can it be fairly said that active managers have posted a strong performance in recent years. But, to give credit where it’s due, managers in some countries and in specific sectors have done modestly well.
In the large-cap category, Japan and India had the largest proportion of outperforming domestic equity funds over the five year period ending in December 2014 — although, in both countries, slightly more than half of managers still failed to beat their benchmarks. As for asset-weighted excess returns, India came out on top, followed by Japan, Europe and Australia.
In the mid- and small-cap category, Australia performed the best, with 81.4% of active funds outperforming the benchmark over five years. India and Japan were the only other countries where more than half of active managers beat their benchmarks.
Does this make a strong case for investors in India, Japan and Australia to use actively managed funds? Absolutely not, for three main reasons.
First, most of us invest for 20, 30, 40 years or more, so a five-year time period is relatively insignificant. Nor is it long enough to distinguish luck from genuine skill. The longer the time period the harder it is for an active manager to outperform. Also, of course, you don’t know how long a manager is going to stay at a particular fund.
Secondly, investment portfolios should be widely diversified. It would be very unwise, for instance, for an Indian investor to invest exclusively in large-cap Indian stocks, or for an Australian to restrict their investments to Australian mid- and small-caps. Active investors need to find managers who can outperform in a wide range of asset classes.
Thirdly, although there are pockets of reasonable performance by active managers, investors still have the problem of identifying outperformers in advance. Research has shown time and again that it’s extremely hard, if not impossible, to spot a “star” manager before they actually become one.
I would never say never use an actively managed fund. If you want to take a punt on one, go ahead, but remember that, after costs, you must expect to lose relative to the average passive investor.
Yes, the world’s least incompetent fund managers deserve congratulating. But, to make a credible case for active, they’re going to have to do even better and hope that their fellow managers don’t keep letting the side down.