CONSISTENCY OF MANAGER OUTPERFORMANCE
It is often debated whether managers do outperform their benchmarks and if so, whether it is achieved in a consistent way. In a previous study we showed that only 6.1% (8 out 133) of fund managers outperformed the FTSE/JSE All Share Index (total return) for the three years ending 30 September 2015 and continued to do so over the next two years to 30 September 2017. At the time, we predicted that this number would continue to shrink as we move closer to 30 September 2018, and that by choosing an outperforming manager you would probably have underperformed the market by a substantial margin over following periods.
Looking back, it is interesting to evaluate how managers performed during the two-and-a-half-year period after taking the initial snapshot. As in the past, we keep using 3-year unit trust fund data in the General Equity sector of South Africa so as to compare apples with apples. The snapshot below lists all funds in the General Equity sector on the x-axis and their related performance on the y-axis for the period ending 30 September 2015. The black bar indicates that the market returned 15.38% p.a. for the three years from 1 October 2012 until 30 September 2015. The green bars indicate that only 31 funds outperformed the index i.e. 28.7% of funds performed better than the index over this three-year running period.
The original snapshot – 30 September 2015
Statistics for the three years from 1 April 2015 to 31 March 2018 tell a different story altogether in that the index return was 5.06% per annum (black line in graph 2 below) with only 10.16% of funds performing better than the index – the green columns once again showing that only 13 out of 128 funds performed better than the market return.
How managers perform over time – 31 March 2018
It must be asked then what happened to the original group of outperforming funds we looked at in Graph 1? Graph 3 below presents an overlay of the funds in Graph 1 and Graph 2, clearly indicating a performance migration down by a sizeable number of previous outperforming funds. Only two of the previous ‘’performing’’ funds are still outperforming the index (blue lines) while the rest of the previous outperformers (yellow lines) are now underperforming the market.
One of these consistent performers is the Gryphon All Share Tracker Fund, who follows a sampling approach in tracking the total return of the JSE All Share Index and who performed just above the index, leaving only one active fund outperforming over both measurement periods. Based on this data, one could certainly conclude that most active and beta general equity fund managers do not consistently outperform the index over longer periods.
I am curious as to what may happen over the next six months with regards to the next 3-year measurement period ending 30 September 2018.
Will some of the previous out-performers catch up over the next six months to re-claim its place as an out-performer or may we end up with no active manager outperforming the index consistently as to the end of September 2018? Let’s wait and see ……
Perhaps more important lessons to learn from this study:
Those managers that outperformed for the 3 years to 30 September 2015 only managed to return 2.74% for the three years to 31 March 2018 (arithmetic average). This is 2.32% below the index return of 5.06%, placing them in the third quartile at a ranking of 46.9% - below the median fund. In other words, if you chose an outperforming manager you destroyed value in the period that followed;
The fund which was the fourth best performer as at 30 September 2015 was in the last place as at 31 March 2018. In other words, they underperformed all peers and returned a negative return of -4.13% over subsequent periods. That is an underperformance of 9.19% per annum;
Naturally, most of today’s outperformers were yesterday’s underperformers and it would therefore have been incredibly difficult to pick an outperforming manager from the list of previous underperformers;
Choosing an index fund seems to have been a better solution to cover your bets in two ways: One, you would have without question outperformed most managers on a consistent basis, and second, prevented massive underperformance by having made use of an index tracking fund.
Our advice continues to be as follows:
Be careful not to make investment decisions based on the outperformance of managers within a particular time-period, but rather look for consistency over longer investment cycles.
A well-balanced portfolio requires exposure to a passive solution both from a cost and risk mitigation point of view.
Gryphon Asset Management
* Three funds from the above study were closed since 30 September 2015.
* Four funds had name changes and have been accounted for.