Photo: RNZ / Rebekah Parsons-King
Avoiding too much exposure to the United States in the first half of this year might have served active investment managers well, but they aren't generally delivering better returns than the market overall, new data indicates.
S&P Dow Jones Indices has published its mid-year Spiva Scorecard, which shows that 60 percent of actively managed global equity funds in New Zealand were able to outperform the S&P World Index in the first half of this year.
This is based on returns net of fees.
The scorecard looks at the performance of actively managed funds against benchmarks over a number of time horizons.
Active managers are those who select investments for their funds, to try to beat the market. In contrast, passive funds tend to aim to track an index.
S&P Dow Jones Indices head of index investment strategy Sue Lee said the global index was usually where active managers did not do well.
"If you look at the 10-year or 15-year performance rate, 100 percent of [managers] we examine actually underperformed the benchmark, so this 60 percent outperformance rate is actually very unusual, and one of the highest we've seen in New Zealand."
She said it could be because of how managers dealt with US investments earlier this year.
"If you look at everything in the same currency, in USD, a lot of developed markets and emerging markets actually outperformed the US market peak, partly driven by the sharp depreciation of the US dollar...I think a lot of [active managers] actually had underweight in the US equities and if they have done that, they outperform the benchmark."
New Zealand equities also lagged other markets in the first half of this year, partly because of concerns about the local economy.
Lee said 62 percent of actively managed New Zealand equity funds underperformed the S&P/NZX50 in the half-year.
She said there were a small number of stocks in New Zealand that had high index weightings, such as Fisher and Paykel Healthcare, Auckland International Airport and Infratil.
"Active managers will be evaluated against the benchmark and how they how they positioned in these three stocks relatively to benchmark can actually be a very big factor in New Zealand ... these stocks did really well the past years and ... they became such a high weighting in the index.
"But then in the first half [year], that kind of flipped and each of these stocks underperformed the benchmark."
She said any manager who had less exposure to those big stocks would have outperformed.
Nuances for Kiwi managers
Chris Douglas, partner at Mapua Wealth, said it was for that sort of reason that it had been difficult for fund managers to outperform for a long time.
"Globally if you didn't hold Invidia, Facebook, Google Amazon, Microsoft, it's going ot have a big impact on the performance of your funds.
"That's certainly been a headwind for sure over the last five or ten years for any active manager."
He said there were some nuances to keep in mind in New Zealand.
The "global equity" fund universe here would include global infrastructure investments, for example. "That gets caught up in the data and shows they've under performed but they should be in their own peer group in another market ... sometimes when you're looking at the broader peer groups they have, within New Zealand there's some different funds that are quite different characteristics to what a global equity fund would be [overseas] ... it's not always an apples versus apples comparison.
"The structure of the product, the biases it might have, the indices tracking which might not always nicely match what the S&P indexes are."
Lee said there were a number of reasons why active managers might underperform but one was fees.
"Fees really add up over time and passive funds usually have a much better cost compared to active funds."
Costs biggest deterrent
University of Auckland finance lecturer Gertjan Verdickt said it was "exceptionally challenging" for active managers to consistently outperform a passive index.
"First and foremost are costs. Research consistently shows that the average active fund earns negative risk-adjusted returns once all fees, transaction costs, and other expenses are accounted for. These costs create a high hurdle that managers must overcome to break even with a low-cost index fund.
"Second, our markets are reasonably efficient. This means that finding genuinely mispriced stocks is a challenging task, and doing so consistently over extended periods is even more difficult. Industry scorecards from around the globe confirm this, showing that the percentage of active funds that underperform their benchmarks almost always increases over longer time horizons, such as 10 or 15 years. Outperformance is the exception, not the rule."
Verdickt said managers would chase returns.
"If you are a manager with a bad year, you will likely copy the strategy of a winner - making that strategy obsolete. Similarly, investors chase returns: if you invested in a loser, you will switch toward a winner. However, not every strategy can handle a significant inflow of capital."
He said the most powerful predictors of future success were not the specific stocks a fund holds, but rather characteristics of the fund itself.
"The two that stand out are fund momentum (a fund that has been performing well tends to continue performing well) and fund flow (skilled managers tend to attract new investment)."
He said best-performing funds were often those that are "too small" in relation to their manager's capabilities.
"This implies that top managers are exploiting market inefficiencies before the broader market catches on and floods the fund with so much capital that the strategy becomes diluted.
"It's a common belief that a key benefit of active management is the ability to protect capital in a downturn ... However, my view is that the evidence on this is mixed: Recent analysis that tested top-performing strategies across different market cycles found that, while they did perform somewhat better during recessions, the difference was not statistically significant. This suggests that while some individual managers might successfully navigate a downturn, it isn't a guaranteed feature of active management as a whole."
He said people should also remember that performance data was flattered by survivorship bias.
"A huge percentage of funds-in some cases up to half over 15 years-are merged or liquidated. These are typically the worst performers, and when they are removed from the data, the average performance of the remaining funds appears much better than reality. Any sound analysis must take this into account."
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