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28 Jul 2016

How Many Local Equity Funds Have Consistently Beaten An Index Fund?

Over the last ten years, which active managers have delivered consistent performance?

As noted on Moneyweb earlier this week, there are a number of reasons why effective active management is possible. There are good reasons why skilled fund managers can outperform the market.

What is more difficult, however, is for an active manager to do so consistently. And even trickier than that, is for the average investor to identify such a manager in advance.

The truth in just how difficult this is is revealed in an analysis conducted by Moneyweb that looked at equity fund performance over the last ten years. The question we posed was how many active fund managers have beaten an index fund over rolling three year periods between the start of July 2006 and the end of June 2016.

According to Morningstar figures, there are currently 165 funds in the South African equity general category. Of those, 55 track records of ten years or more. Two of those are index-trackers, which leaves 53 active equity funds in the universe.

Since both of the index funds we could use track the FTSE/JSE All Share Index, their returns were similar. We therefore chose the Stanlib Index Fund for the purposes of the analysis simply because it is the larger fund.

Using rolling three year returns we then determined how many active funds outperformed this index tracker over the eight three year periods that began on 1 July from 2006 to 2014, with the most recent ending on June 30 2016.

Here is the list of funds that achieved this consistency of performance:

Funds that consistently outperform an index fund
Foord Equity Fund
Marriott Dividend Growth Fund
SIM General Equity Fund

Source: Morningstar & Moneyweb 

That’s it. Three funds out of the 53, or 6% of the universe were able to outperform the index fund over all eight three year periods.

Before examining this further, we must acknowledge the shortcomings in this analysis. The first is that we chose one index fund and not the other. However, the truth is that if we had used the second fund – the Gryphon All Share Tracker Fund – the number wouldn’t have changed.

Again, only three active funds would have achieved the feat of consistent outperformance. What is interesting, however, is that it wasn’t the same three funds. Only the Foord Equity Fund trumped both index funds over all the periods analysed. For the record, the other two funds that outperformed the Gryphon Fund were the Old Mutual Managed Alpha Equity Fund and the Coronation Equity Fund.

The second criticism might be that consistency of performance and long-term performance are not the same thing. If one looks only at simple ten year returns, the number of funds that outperformed the index trackers is much higher at 23, or 43% of the universe.

However, we specifically wanted to look at rolling three year returns for very particular reasons.

The first is that over the last ten years, the market has been through a number of distinct cycles. One of the questions this analysis answers, therefore, is which managers outperformed the index tracker through all of these cycles. Whether the market was up or down, or whether we were in a period of rand strength or rand weakness, how many managers were always better than an index tracker?

Secondly, the problem with looking at simple ten year returns is that they are only from one point to another. If you got in and out at exactly those points, that is the return you will see, however what about all the possible entry and exit points in between?

This is particularly important if you are making monthly contributions into a fund, or if you are making regular withdrawals. Looking at rolling three year returns provides a much better picture of how consistent the performance was and therefore how likely an investor would be to see this excess return no matter at which point they bought into or sold out of the fund.

What then can we take from these findings?

The first is that one can safely say that the managers who showed consistent outperformance had to have displayed unusual skill. It is difficult to argue that they benefited from random good luck through all of these market cycles.

That said, however, it would have been extremely difficult for any investor to have known beforehand that these three managers would be the ones to deliver outperformance. The chance of picking a manager that didn’t consistently beat an index-tracker was far higher.

Even knowing that these managers delivered outperformance over the last ten years, does not provide any guarantee that they will do it again. Despite the skill that they have shown, nobody can be sure that the market will reward them in the same way in the future.

Also, while there is some serious quality in the teams managing these funds, and the processes they are using are well established, the actual individuals managing these funds has changed over this period and will continue to change.

The team at Marriott has perhaps been the most consistent over the last ten years, but of the three men who manage the Foord Equity Fund, the longest serving has been responsible for this fund since 2009. In the case of the SIM General Equity Fund, the longest manager’s tenure only goes back five years.

An investor simply can’t know what impact future changes to these management teams might have.

All of which is a long-winded way of saying that, unquestionably, it is possible for active managers to deliver consistent outperformance. And those that do, should be recognised as exceptional.

However, investors have an extremely difficult task if they want to pick these managers before the outperformance happens. It was hard enough when there were only 53 funds to choose from. How much chance do they have when there are 150?

Patrick Cairns


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