The majority of Australian active funds in most categories failed to beat their benchmarks in the 2016/17 financial year, continuing a trend that has sent a flood of money into low-cost passive portfolios.
The S&P Dow Jones SPIVA Australia Scorecard for the 12 months to June shows that two-thirds of Australian equity funds and more than half of international equity funds surveyed underperformed their benchmarks in 2016/17.
The proportion of funds that failed to beat their benchmarks over the long term is even higher. Over 10 years, 75 per cent of Australian equity funds and 90 per cent of international equity funds underperformed.
This long-term underperformance has triggered strong flows into passive funds, especially index ETFs. The Australian ETF market is a $30 billion market today and is forecast to hit $100 billion over the next five years
In turn this funds flow has prompted comments that investors are in a passive “bubble” and will not have any downside protection when the next bear market comes.
Alex Vynokur, the chief executive ETF company Betashares, says criticisms of ETFs don’t stand up. “The last bear market started in late 2007 and over a year the market went down around 50 per cent. If you were invested with an active manager you would have lost 45 per cent. You still lost money.
“Index ETFs bring accountability to a market that has been full of expensive alternatives.
“The other thing to keep in mind is that ETFs in Australia are 2 per cent of the trading on the ASX. They do not dominate trading and they are not distorting the market.”
Talis Putnins, a professor of finance at the University of Technology, Sydney, says the shift from active to passive equity fund management has prompted questions about whether this represents a misallocation of capital.
Speaking at a UTS and Portfolio Construction Forum Investment Management Research Conference in Sydney last week, Putnins rejected this argument, saying there was no evidence of a fall in the amount of stock specific information in stock pricing.
The S&P SPIVA Scorecard reports on the performance of actively managed Australian managed funds against their benchmarks over one, three, five and 10-year periods. Coverage includes 730 Australian equity funds, 363 international equity funds and 83 Australian fixed interest funds.
Australian equities (general): 61.7 per cent of funds underperformed the S&P/ASX 200 over one year; 65.7 per cent of funds underperformed the benchmark over three years; 64.7 per cent underperformed over five years and 75.3 per cent underperformed over 10 years.
Over the past 10 years, the average Australian equity fund return has been 3.5 per cent a year, compared with the benchmark return of 3.6 per cent a year.
Australia mid-cap and small-cap equities: 81.1 per cent of funds underperformed the S&P/ASX Mid-Small Index over one year; 68.8 per cent of funds underperformed the benchmark over three years; 51.5 per cent of funds underperformed over five years; and 36.8 per cent underperformed over 10 years.
Over the past 10 years, the average mid-cap and small-cap fund return has been 4.6 per cent a year, compared with the benchmark return of 1 per cent.
International equity funds: 56.5 per cent of funds underperformed the S&P Developed Ex-Australia Large-Mid Cap Index over one year; 84.1 per cent of funds underperformed the benchmark over three years; 91.2 per cent of funds underperformed over five years; and 90 per cent underperformed over 10 years.
Over the past 10 years, the average international equity fund return has been 4.1 per cent a year, compared with the benchmark return 5.8 per cent.
Australian fixed interest: 66 per cent of funds underperformed the S&P/ASX Australian Fixed Interest 0+ Index over one year; 96 per cent of funds underperformed the benchmark over three years; 78 per cent of funds underperformed over five years; and 86.4 per cent of funds underperformed over 10 years.
Over the past 10 years, the average fixed interest fund return has been 5.6 per cent, compared with the benchmark return of 6.3 per cent.
Australian REIT: 12.5 per cent of funds underperformed the S&P/ASX 200 A-REIT index over one year; 71.8 per cent of funds underperformed the benchmark over three years; 76.6 per cent of funds underperformed over five years; and 72.1 per cent underperformed over 10 years.
Over the past 10 years, the average AREIT fund return has been a loss of 0.05 per cent a year, compared with the benchmark return of 0.1 per cent a year.
