For 20+ years our investment strategies have been based on academic evidence to generate the returns to fund lifetime client goals. Core to this strategy is capturing market return year after year, harnessing the power of compound returns to maximise the probability of success.
As part of our ongoing diligence, we study the S&P research, which examines the world’s active investment managers, to quantify their results in delivering superior returns by picking the best stocks to own and when to sell. The only change in the December 2021 report is market volatility which has made no difference with the majority of active managers, again failing to deliver on their client value proposition. The report for 31 December 2021 concludes >70% of active managers underperformed the benchmark over 5 years and >80% over 10 years in Australia. The results for international equities are worse with >90% failing to deliver higher than market returns over 10 years.
Research provided by SPIVA (S&P Dow Jones Indices) to 31 December 2021. Australian active managers in this study compared to S&P/ASX 200 & international active managers compared to S&P Developed ex-Australia Large/Mid Cap.
The 10-year results would be significantly worse if the 25% of funds who closed in the period from 5 to 10 years presumably to poor performance were included.
Why does this topic repeat? “Logic” suggests humans should be smart enough to predict the future by doing lots of study however, reality continues to demonstrate past performance very rarely equals future performance. For those interested, the same study found out of 199 funds who were the top 25% performing in 2017 only 6 (or 3%) remained in the top 25% just 4 years later in December 2021. So why is this so?
- Active managers typically charge >1% pa which means they start >1% behind the market day 1 of every year. This is a serious handicap to overcome, and it gets worse after including high relative trading costs for multiple buys and sells & the tax investors may pay on realised capital gains.
- Humans generally don’t make accurate future predictions be it weather, markets or sporting results.
- There are very few individuals who have the ‘gut instinct’ to trade successfully and those who do generally do so for a very limited timeframe. Think Magellan and Platinum who both delivered great returns for a period but have failed to deliver long term particularly when the founding investment manager departs.
- Young funds start their life cycle with “higher risk, higher return” calls to make their name with smaller balances. As the fund size grows the strategy changes to “play it safe and protect what they have built” which results in market tracking results but with higher fees which means results become very market like.