Most actively managed South African equity funds underperformed the market last year, according to the latest S&P Indices Versus Active (SPIVA) scorecard.
The SPIVA, which is compiled by S&P Dow Jones Indices, measures the performance of actively managed, rand-denominated South African equity and fixed-income funds against various benchmark indices over one-, three- and five-year investment periods.
South African equity markets surged in the second half of last year, to produce a return of 22.6% in 2017, as measured by the S&P South Africa Domestic Shareholder Weighted (DSW) Index. However, only 4.08% of investors in active South African equity funds earned a return that beat this index.
The SPIVA also compared how local equity funds performed against a capped version of the S&P South Africa DSW. This is regarded as a more realistic benchmark, because, in order to avoid concentration risk, fund managers will limit a fund’s exposure to a single share. As the “Rands & Sense” column on the facing page points out, one share, Naspers, which has the biggest weighting of 21.5% in the S&P South Africa DSW, has driven returns in the local equity market over the past few years. But it is unlikely that an active fund manager would have had this level of exposure to the share.
The S&P South Africa DSW Capped Index, which limits the weight of any share to 10% of the index, returned 15.64% to the end of December. However, only 25.51% of actively managed domestic equity funds were able to beat this index.
S&P says the big upturn in local equity markets from the middle of last year was the result of the 25-basis-point cut in interest rates in July, and the hopes towards the end the year that the change in the country’s political leadership would result in better economic growth. S&P says fund managers’ underperformance of the benchmark indices may indicate that they were not well positioned to take advantage of these developments. This seems to be borne out by the SPIVA’s statistics for the six months to the end of June last year. At that time, 44.97% of actively managed equity funds had beaten the S&P South Africa DSW Index. (A comparison for the capped index is not available, because it had not been introduced at that time.)
As Table 1 shows (see tables here), most actively managed local equity funds also failed to beat either the capped or uncapped S&P indices over three or five years.
Table 2 shows the average returns of South African funds compared with the benchmark indices over one, three and five years. On average, the returns from equity funds did not beat the capped or uncapped indices over the three performance periods, although the underperformance was less marked when fund returns were asset-weighted.
When it comes to South-African-domiciled funds that invest in global equities, 32.73% outperformed the S&P Global 1200 Index over one year. The percentage of funds that beat the index dropped significantly over the three- and five-year periods to 11.11% and 7.14%, respectively.
However, the results were more encouraging when it comes to the performance of actively managed fixed-income funds that invest in bonds. Most short-term bond funds out-performed the index over all three measurement periods, while actively managed diversified bond funds outperformed the index over three and five years.
ACTIVE MANAGERS RESPOND
The average actively managed fund won’t outperform the index after fees, but every passive fund will underperform, by the fees it charges, the index it tracks, says Duncan Artus, a portfolio manager at Allan Gray, which won the Raging Bull Award for the best South African management company of 2017. “The trick is to find an active manager that delivers above-average performance over the long term.”
He says performance tables do not disclose the risks that a fund took to achieve a return, “and part of our job is to manage risk as well”.
Artus says that choosing which index to track, or deciding the level at which to cap a share in an index, is itself an active investment decision.
Over the past few years, he says, the South African market has been driven to a large extent by the “incredible” performance of a single “outlier”, Naspers (and indirectly by Tencent). Even if Naspers’s weighting in the index were capped at 10%, it made a strong contribution to the returns an investor earned simply by investing in the market.
PSG was the second-best manager of South African funds last year. Asked whether he thought the benchmark indices enabled investors fairly and accurately to compare the performance of actively and passively managed funds, Adriaan Pask, the chief investment officer at PSG Wealth, says: “For the purposes of comparing the straight-line performance of the average manager after fees to the straight-line performance of the indices before fees, they are fine. As a rule, however, there are always shortcomings to using averages, as there are managers that beat the index by healthy margins over prolonged periods, but averages are not designed to highlight these opportunities.
“In addition, by solely considering straight-line performance in any comparison, you neglect many other components that underpin a prudent analysis – in particular, aspects relating to risks.”
ABOUT THE INDICES
- The S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index modifies the S&P South Africa DSW Index to ensure that no single stock weighs more than 10% of the index at each rebalancing. The S&P South Africa DSW Index adjusts the weights of companies in the S&P South Africa Composite Index to reflect the percentage of a company’s total shares outstanding that are owned by South African investors. The S&P South Africa Composite is a float-adjusted (only shares that are available to investors are included, closely held shares and shares held by other companies are excluded), market-cap-weighted index that measures the performance of large-, mid-, and small-cap companies listed on the JSE. The S&P South Africa DSW has 142 constituents. The top 10 holdings are Naspers, Standard Bank, FirstRand, Sasol, MTN, British American Tobacco, Sanlam, Anglo American, Remgro and Shoprite. These holdings comprise 49.9% of the index. Naspers makes up 21.5% of the index. In the capped index, the top 10 holdings make up 41.6% of the index and Naspers’s weighting is 8.8%.
- The S&P Global 1200 captures about 70% of the world’s capital markets. It is a composite of seven headline indices for the United States, Europe, Japan, Asia excluding Japan, Canada, Australia and Latin America.
- The South Africa Short-term Fixed-interest (Stefi) Composite Index approximates the performance of money market instruments in the market.
- The S&P South Africa Sovereign Bond 1+ Year Index tracks the performance of rand-denominated sovereign debt issued by the government in the domestic market, with maturities of one year or more.