Most Australian share fund managers have done worse than the benchmark index over the last five years, highlighting the need for investors to be cautious when entrusting their money.
But over the last year, during the worst of the financial crisis and equity market sell-off, most active funds showed their worth by keeping losses smaller than those suffered by the index.
The Standard & Poor’s Index Versus Active Funds Scorecard, released on Thursday, shows that the S&P/ASX 200 Accumulation Index outperformed 66 per cent of actively managed funds over the five years to June 30.
The index gained 6.9 per cent per annum in that time while the average return of the funds, weighted by assets, was 6.3 per cent.
Over the 12 months to June, the same index only outperformed 29 per cent of funds.
The index slumped 20 per cent in the one-year period while the average losses at active funds, weighted by assets, declined 14 per cent.
The active fund returns were net of fees.
S&P’s director of research and design for index services, Simon Karaban, said he hoped the research would increase debate and raise consumer awareness.
“There’s too much complex research thrown at retail investors and sometimes you need to just absorb something very simple and ask yourself some simple questions,” Mr Karaban told journalists.
“When you look at the average expense ratio of an active fund of say 1.8 per cent, compared to say an expense ratio at index funds of 0.3 per cent it’s only natural to be asking” whether you’re with the right fund.
Mr Karaban said the research was not meant to indicate that index funds were better than active funds.
He also said the choice depended on people’s circumstances and preferences.
BT Investment Management head of equity strategies Crispin Murray said in a discussion following the report’s release that there would always be a place for active funds, who would seek to capitalise on market inefficiency and mispricing.
“If we only had index funds, it would create huge inefficiencies, which active funds would eventually exploit,” Mr Murray said.
An area where active fund managers have had more success is the small capitalisation sector.
The S&P data shows that over the five years the S&P/ASX Small Ordinaries index was outperformed by about half the active small cap fund managers.
Over the last year almost 80 per cent of the fund managers did better than the index.
Mr Murray said that the apparent superiority of index funds over active funds would be eroded if the index fund fees were also taken into account.
Roger McIntosh, head of fixed interest at Vanguard Investments Australia, which manages index funds, said it was up to active fund managers to prove their worth.
“It’s up to active fund managers to demonstrate that they have skill, and it wasn’t just luck,” he said.
All but three per cent of Australian fixed interest managers did worse than the UBS Composite bond index over the past five years.
For the 12-month period, 13 per cent of bond managers outperformed the index.
“The ability for bond managers to outperform is very low,” Mr McIntosh said.