JOHANNESBURG — If you invest in actively managed funds, this interview with Zack Bezuidenhout of S&P Dow Jones Indices is sure to make you sit up and take notice. According to the latest SPIVA South Africa Scorecard Mid-Year 2018 report, over a one-year period, 51% of actively managed South African equity funds and 82% global equity funds failed to beat the S&P South Africa DSW Capped Index and S&P Global 1200 Index respectively. Meanwhile, during a three- and five- year period, the percentage of actively managed South African equity funds underperforming the S&P South Africa DSW Capped Index increased to 60% and 76% respectively. But there’s more as Bezuidenhout explains…take a listen. Gareth van Zyl
Zack Bezuidenhout – who is the head of client coverage Sub-Saharan Africa for S&P Dow Jones Indices SA – joins me on the podcast now from Johannesburg. Zack, so S&P has released its South African mid-year scorecard and there are some interesting findings in here that will rattle a lot of actively managed funds out there. One of the key highlights is that over a one-year period, 51% of actively managed South African equity funds failed to beat the S&P SA DSW capped index. Can you tell us more about how and why this scorecard is put together and what its findings have been?
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Yes, so we basically did a few reports for SPIVA, which is basically ‘S&P Indices Versus Active managers performance, and we collaborate with Morningstar mainly on retail funds that are available. So, these numbers that you see in the report are also ‘after fees’. Therefore, the effective fees will also be highlighted in these reports. Within the SA market, we probably have about 220 companies on the equity side that qualify and we measure them against some of the bigger benchmarks, like SWIX. We have our own version which we call the Domestic Shareholder Weighted Index. There’s also one that caps out at 10% so, that’s where Naspers sort of dominates the SWIX. For some benchmarks, we cap that out. So those numbers are available, depending on how the market wants to look at them.
Spiva South Africa Mid Year 2018 by GarethvanZyl on Scribd
We then can show that over a certain period — over a one-year period, two-year period, and a five-year period — as to how many of the fund managers or funds have outperformed the benchmarks or underperformed the benchmark. Now, the SA market is no different to any other market where the majority of fund managers are struggling these days to outperform benchmarks. Some of the quick highlights of this report for the mid-year of 2018 were that we saw a slight improvement actually on the South African Equity Fund from the previous reports that were out at the end of December last year. The numbers are still actually very shocking compared to some of the global reports that we have, where SA fund managers are actually the second-worst of all the reports that we’ve looked at. Meanwhile, India and Japan, for instance, are some of the better performing active industries.
So, what is making SA such a poor performer then?
There are external factors and local factors that fund managers need to deal with, and I think it’s a tricky game to always make the right calls on that. A lot of the things that they also have to consider is whether they are actually going to support the mid-to-small cap companies or are they going to be buying into the large-cap companies as well. We can see that if we only had to look at the large-cap companies that with the majority of them, 97% of all the fund managers have underperformed the benchmark called the South Africa 50, so that’s similar to a South Africa top 40 Index for instance.
Measured against the large-cap space, they’re really struggling. When they avoid the mid-caps they did a little bit better and we can see that in the DSW capped benchmark as well.
Is this a continuing downward trend then for active managers?
Yes, we see that not only in SA but also in the US, the numbers have deteriorated in the US mid-and-small cap space from the previous report as well. So, we have a US SPIVA that also came out this week but the South African one has decreased over the last three-years again. I think the long-term trend is that they started with about 75% of fund managers under-performing the five-year number. We’re now sitting at a rate of about 89% of fund managers under-performing over a five-year period. It is a bit of a worrying sign.
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Interestingly, we’re seeing a more aggressive trend in the bond market. Your research says that 70% of actively managed diversified or aggregate bond funds underperformed the S&P SA, Sovereign Bond + 1 Year Index. Can you unpack that for us as well? Â
Yes, I think in the bond space, the fees are less of an issue typically. You would actually expect that most managers would usually outperform here because the fee impact is not as significant as what it would be in an equity fund. But it is interesting that this year about 70% of all active managers have underperformed the Sovereign Bond Index. But if we look at the money market space, there you can see again, because the fund managers can access those credits as well. It’s easier for them to outperform benchmarks: again, there are about 90% to 80% of all fund managers who actually outperform a money market benchmark.
Well, the global and local equity market has also cooled off. What factor does this play in your research as well?
I think the big thing is that where investors were typically looking at double-digit returns and then, after fees the impact is not that big for the return that they’re expecting, it’s as if we’re looking at negative returns or single digit return when you deduct 1% or 2% for fees it actually makes a big difference to the performance that you end up with, relative to a benchmark. So, in the lower digit return period, you can actually see that most fund managers would look like they’re underperforming more because of the impact of fees.Â
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Finally, what ramifications does this have for the active versus passive debate, because this has been a debate that has been raging on for quite a while now, and both sides always seem to think that they’re right?
Yes, I think the thing is that we obviously don’t want to do is pick sides between active and passive, but rather just be the messenger, in this case, to highlight some of these numbers. We really want to make people aware and to think twice about how they’re actually gaining access to the market. But I think that what investors should be looking at is how do they gain access in those markets? Are they working through an advisor or platform where there are also fees involved? Or are they considering new options like Robo-advisors where they can just go online and get access directly? Also, are they being very cognisant of fees because that impacts the performance relative to the benchmark as well? Then also, are they considering different asset classes. As you mentioned, the equity market looks a bit volatile and there’s lots of selling down so it might be a good idea to really understand whether you’re looking for equity exposure, bond exposure, or do you need a bit more protection of diverse buying across asset classes?
Zack Bezuidenhout, thank you so much for taking the time to chat to us today. It’s been fascinating finding more about this.
Great, thank you so much for having me.
