Imagine if every time you were given something to do at work, you stuffed it up two-thirds of the time. You’d have to be particularly resilient, if not actually thick, to keep doing that job. If all the available evidence suggested that you’d only get the result you wanted one-third of the time, you might well be advised to pack it in. But look on the bright side: there could be a career for you in funds management.
I’m not even joking. In the five years to the end of 2015, only 32.8 per cent of large-cap Australian equity funds managed to beat the S&P/ASX200 Index. I’m no wiz at maths – which is really all that’s holding me back from making a lot of money by working in funds management – but I believe 32.8 per cent is less than one-third.
How do I know about this endemic underperformance? S&P Dow Jones Indicies told me, that’s how, in its 2015 SPIVA Australia Scorecard. SPIVA stands for something I can’t remember but it measures the performance of active funds against market indicies. Oh yeah: S&P Indicies Versus Active managers – that was it.
But even the managers of large-cap Australian equity funds (or Australian equity general funds, as S&PDJI calls them) managed to make their international equity general, Australian bond and real-estate investment trust counterparts look like dullards. In these categories, 88.24 per cent, 87.04 per cent and 85 per cent, respectively, of funds underperformed their relevant indicies. Think about that for a moment. Think, also, about the fees they charged investors.
Now, this presents something of a conundrum to those who would presume to advise clients on which funds to buy. On the face of it, a sensible response might be to eschew actively-managed funds altogether and buy instead funds – like, but not only, exchange-traded funds – that aim for nothing more ambitious than to faithfully track the indicies. SPIVA suggests that even this modest goal will put you ahead of investors in the significant majority of other funds.
But if you’ve been looking at the Professional Planner website recently, you might have spotted an article written by the founder and chief investment officer of Montgomery Investment Management, Roger Montgomery, under the totally non-inflammatory headline, Index investing is dumb.
Montgomery’s quite reasonable thesis is that since the Australian share market is dominated by thoroughly underwhelming businesses, the performance of the index that largely reflects the performance of those businesses is bound to be just as underwhelming.
It’s difficult to argue against that logic; the answer, Montgomery asserts, is to buy other companies – ones that will perform better than the companies that dominate the index – thereby producing an investment return for yourself that beats the index. This is what’s called active management. Astute readers will have deduced by now that Montgomery is an active manager.
All well and good, except that the SPIVA analysis tells us that you’d better be very careful indeed when you try to pick an active manager, because most of them really are not very good – if by “very good” you mean “able to produce a better return than you’d get if you essentially did nothing”.
I’ll ponder this the next time I fail to meet a KPI. I’ll point to some of the biggest, best-known financial brand names, and remind the boss that if I’m not getting it wrong more than 85 per cent of the time, I actually represent pretty good value.
