Active versus Passive, what debate?
Updated: May 21, 2019
The 2018 SPIVA report is out. The Standard and Poor’s Indices Versus Active (SPIVA) measures the performance of actively managed funds in the South African Equity market against their respective benchmarks over a one, three and five year period. So in english, basically how well do unit trusts perform against the benchmark that they are trying to beat, which in this case is the S&P South African Shareholder Weighted Index. Now I am not sure this is the benchmark we should be measuring against as this takes foreign shareholding out of the shares weighting in the index, but this is a point for another day.
In the industry there is this debate that sometimes takes place about if it is better to give you money to a fund manager such as Coronation, Prudential, Allan Gray, Investec (this list could go on for a while), or rather just buy a simple index tracking product such as an ETF like the Satrix Top40.
Now despite this debate being settled for a long time now, if a first-time investor had to approach an industry professional or a financial adviser working for a bank or a fund manager, a majority of the time the client will be advised to go the route of the fund manager. Now, this is somewhat understandable given that they are working in this industry and they are protecting their own interests. However, this doesn’t change the fact that the truth is important and the client’s interests should come first, particularly when it comes to a matter such as where to put your money for a couple decades.
The latest SPIVA report is much like the results of the prior years. Once again actively managed South African Equity funds underperform passive indexes by a considerable amount over a three (84.66%) and five year (91.03%) period and the longer that you are invested, the more the funds underperform. The results are even worse for South African funds targeting the offshore market as 92.86% of them underperform the S&P Global 1200 index over a five year period.
One of the more embarrassing figures in my opinion, is the survivorship rate of these actively managed funds. This figure shows the percentage of funds that still exist after the five year time period is up.
At the beginning of the five year period there were 200 South African actively managed equity funds in existence. After the five year period was concluded in 2018 only 148 of those funds were still around. A 59.5% survivorship rate. This is not necessarily because investors decide to withdraw their money from these funds, but rather because the fund managers decide to move the clients' money into a different fund that they manage which doesn’t have such a terrible performance record.
So good luck choosing one of the 8 funds out of 100 that will over-perform in this period, and if you do, well done and good luck for the following five years after this. I personally prefer investing based on solid evidence, and based on this it is an easy choice to just buy a simple and cheap product that tracks an index (an ETF).