By Daniel Ung, CFA, CAIA, FRM and Zack Bezuidenhoudt
S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the SPIVA U.S. Scorecard in 2002. Over the years, we have built on more than a decade of experience publishing that report by expanding coverage into Canada, India, Japan, Australia, Latin America and, more recently, South Africa. This report marks the launch of the SPIVA South Africa Scorecard. While the report will not end the debate on active versus passive investing, we hope to make a meaningful contribution by examining market segments in which one strategy works better than the other.
The SPIVA South Africa Scorecard measures the performance of actively managed, South African equity and fixed income funds denominated in South African rands (ZAR) against their respective benchmark indices over one-, three-, and five-year investment horizons.
SCORECARD RESULTS
Overall, 2014 turned out to be somewhat mixed for South Africa, owing to labor disputes, electricity shortages, and slowing domestic demand. However, the performance of ZAR-denominated domestic equities, as measured by the S&P South Africa Domestic Shareholder Weighted (DSW) Index, managed to hold up. The index rose by 16% over the year, partly as a result of the fall in oil prices. In spite of that, South African equities lagged global equities during this period. The performance of fixed income was also lackluster, as investors were preoccupied with the expected interest rate path in the U.S. and Europe, in addition to the previously mentioned domestic issues.
The dramatic retreat in oil prices was certainly one of the reasons why the South African market experienced bouts of high volatility in 2014. Normally, this would be fertile ground for active management, as managers could utilize their stock-picking skills to take advantage of the perceived discrepancies in the market. However, our report shows that the majority of South African equity funds invested in both the domestic and international markets lagged their respective benchmarks over the one-year period. This pattern of underperformance continued over the longer term as well. When looking at the five-year period, about 85% of domestic equity funds and 97% of global funds trailed their respective benchmarks.
In regards to fixed income, the results were mixed. While active managers beat their respective benchmark in the short-term bond category, this outperformance was not repeated in the longer-maturity diversified/aggregate bond category.
Another observation from our analysis is that the size of the fund (e.g., the amount of assets under management) appears to matter. Results from Reports 3 and 4 highlight that asset-weighted returns across the three time horizons examined were generally higher than equal-weighted returns. In addition, equity funds also seem to disappear at a meaningful rate. Over the five-year period, approximately 20-30% of funds were either liquidated or merged. Fixed income funds were affected to a lesser extent.
A UNIQUE SCORECARD FOR THE ACTIVE VERSUS PASSIVE DEBATE
Since its first publication 13 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. Over the past decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.
Beyond the SPIVA Scorecard’s widely cited headline numbers is a rich data set that addresses issues related to measurement techniques, universe composition and fund survivorship that are less frequently discussed, but are often more fascinating. These data sets are rooted in the fundamental principles of the SPIVA Scorecard that regular readers will be familiar with, including the following.
- Survivorship bias correction: Many funds might be liquidated or merged during a period of study. However, for someone making an investment decision at the beginning of the period, these funds are part of the opportunity set. Unlike other commonly available comparison reports, SPIVA Scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.
- Asset-weighted returns: Average returns for a fund group are often calculated using only equal weighting, which means the returns of a ZAR 100 billion fund affect the average in the same manner as the returns of a ZAR 100 million fund. An accurate representation of how investors fared in a particular period can be ascertained by calculating weighted average returns in which each fund’s return is weighted by net assets. SPIVA Scorecards show both equal- and asset-weighted averages.
- Data cleaning: SPIVA Scorecards avoid double counting multiple share classes in all count-based calculations by using only the share class with greater assets. Index, leveraged, and inverse funds, along with other index-linked products, are excluded because this is meant to be a scorecard for active managers.
