Active managers beat the market – some of them, some of the time, when risk adjusted
The debate over which is better – high-impact, actively managed collective investments, or low-cost, passive collective investments – is a hot one. On the one hand, people cite long histories of index outperformance – over the long term, there is little evidence that fund managers can consistently outperform indices; in other words, few unit trusts have been able to deliver more in the way of returns than, say, the JSE Top 40. Add to that the relatively high fees active managers charge, and you have a solid case for sticking to ETFs. On the other side of the debate, fund managers point to the fact that in any given year, several active funds will deliver greater returns than the benchmark index. They also argue that active managers help deal with risk by actively rebalancing. It's a complicated debate. But, according to Plexcrown CEO Ryk de Klerk, in South Africa this year, at least, the top performing investment managers, including Allan Grey and Coronation, delivered solid, market-beating returns. – FD
ALEC HOGG: Well, the Oscars of the Unit Trust industry are called the Raging Bull awards. They're awarded every year, compiled by Plexcrown Profile Media, and published by the Independent Newspaper Groups Personal Finance. The most recent edition has just been delivered and Ryk de Klerk, the Chief Executive of Plexcrown is with us here in the Cape Town studio. Ryk, thanks for coming through all the way from Durbanville. It's a long way in the Cape isn't it, with your traffic?
RYK DE KLERK: It's round about 45 minutes, yes.
ALEC HOGG: Well, I hope that we can give you great value or that you'll get great value from that long trip. The Raging Bull awards are well established. How long have they been going for?
RYK DE KLERK: The Raging Bull awards have been going now for 18 years. In fact, it was the old Plexus and Personal Finance and Profile that got together to recognise the winners and top performers in the industry. In 2005, we went over from a straight performance only to a risk-adjusted performance. We established the Plexcrown Fund ratings in 2004, and ever since then the ratings have been used to calculate the risk-adjusted winners for individual funds and to calculate their management company ratings as well.
ALEC HOGG: Well, the management companies – again this year – Coronation Allan Grey dominated again. Have they been doing so for a long time?
RYK DE KLERK: Well, Alan Grey has been there for the past four or five years, ever since they qualified for the management company ratings. Coronation has been there, then for two or three years they dropped out, and they came back strongly in 2012 and 2013.
ALEC HOGG: And this is only for active managers of Unit Trusts. How did they compare as a unit or as a group against Index Funds and Exchange Traded Funds?
RYK DE KLERK: Well, what's interesting is that late last year I compared the general Unit Trusts to the Index Funds and especially the Satrix 40. On a risk-adjusted basis, the active funds and especially your top performing active funds; they outperformed the index as measured by the Sanlam Index Fund, and significantly outperformed the Satrix 40, but that's on a risk-adjusted basis. If you look at the previous quarter as well, you can actually see – if you just compare performances – that the active managers, compared to the index, added significant value.
ALEC HOGG: These are the good ones, so clearly, not every single one…
RYK DE KLERK: No, that's on average.
ALEC HOGG: It's on average. You'd do better by putting your money with an active manager than you would with an index fund.
RYK DE KLERK: If you look at the average of the category – obviously, there are laggards and there are leaders – but the leaders in fact, are doing significantly better than the laggards and they're doing better than the index.
ALEC HOGG: It's an interesting topic and, I guess very complex, but you try to get the turbulence out of the system by finding consistent performance. How do you do that?
RYK DE KLERK: Well, we use up to five measures. For instance, we have a clear benchmark. We use the Sharpe ratio; that's the returns per unit of volatility. We use the Sortino ratio. We use the Sortino ratio; that's the returns per unit of downside deviation – that's downside risk. Then we use Alpha as well, how you in fact compare…how the Fund Manager in fact adds value above that of the average of the industry. We have the Treynor ratio as well where we look at the return per unit of systematic risk.
ALEC HOGG: It's pretty complex. This is not something…you don't just take out your calculator and do a couple of numbers. Do the fund managers themselves know how to apply these different formulae?
RYK DE KLERK: I think that overall, all the fund managers in fact, do their calculations on the ratios etcetera. What we've done in fact, is just to bring it together and that is effectively for the ordinary man in the street and even financial advisors etcetera. That is to say, 'how can you in fact, see the difference between funds?' and that's on a risk-adjusted basis. It's all in one number ranging from one to five; the top ones being rated five and the lower ones, rated one.
ALEC HOGG: Ryk, where is your money? What unit trusts are you invested in?
RYK DE KLERK: To be honest, the top guys…
ALEC HOGG: So you would go with Allen Grey, Coronation, maybe a little bit of Nedgroup, and leave the laggards behind.
RYK DE KLERK: I think one has to be very careful insofar as that's concerned, because remember the five-year in fact carries a lot of weight, and as time goes on, significant outperformers five years in fact, falls away. What's interesting is that we do a three-year only as well, to see how in fact, the fund managers stack up.