‘For every winner there is a loser’: Why fund managers fall short


The extent to which active share fund managers – particularly those that invest in global markets – struggle to produce returns exceeding their benchmarks has been laid bare in new research.

Active funds promise to outperform markets after fees, but few do so, and those that outperform for a period often fall back to the pack, performance data analysed by online investment adviser and fund manager Stockspot shows.

Chris Brycki, founder of Stockspot, says actively managed share funds struggle to produce returns that justify their fees.Credit:Kim Irving

The study by Chris Brycki, founder of Stockspot, shows just six of 244 global share funds, or 2.5 per cent, were able to outperform their benchmark, after fees, in the five years ended April 30.

“There has been a lot of money put into fund managers that invest in global sharemarkets, but the results show how hard it is to outperform,” Brycki says.

Brycki uses Stockspot’s preferred exchange-traded funds (ETFs) as proxies for market returns in the study.

For a comparison with global share funds, Brycki uses the iShares Global 100 ETF listed on the Australian Securities Exchange, that tracks the performances of the 100 largest companies listed on global sharemarkets.

ETF units can be bought or sold just like shares in companies. They have much lower fees than funds that are actively managed.

Someone who invested $100,000 in the iShares Global 100 ETF five years ago would have $194,151 today, compared to $154,427 for someone who earned the average return of the 244 actively managed global funds in the study.

Actively managed Australian share funds fared better, with 80 out of 311 funds, or 25.7 per cent, outperforming the Australian sharemarket over the five years, after fees.

The proxy for the Australian sharemarket is the ASX-listed Vanguard Australian Shares Index ETF, which tracks the benchmark S&P/ASX 300 index.

Active funds that invest in Australian smaller capitalised companies had the best success rate – 31 out of 85, or 36.5 per cent, of the funds outperformed the ASX-listed Vanguard MSCI Australian Small Companies Index ETF.

Brycki says active investing is a “zero-sum game, in that for every winner there is a loser.” As such, you expect active managers to achieve a return similar to the market return, minus fees and other trading costs, he says.

Byycki says that is particularly true in highly competitive and professionalised markets, such as Australia and the United States, where large companies are covered by hundreds of analysts and fund managers who have very little “edge” over each other.

Active managers can have periods of outperformance that are largely driven by their investment style, he says.

Brycki says the flows of money into actively managed funds generally peaks about the same time that they are experiencing good relative performance to their benchmarks.

He remains somewhat sceptical over the value of various awards given to fund managers by researchers.

Brycki says the researchers tend to reward recent past performance, discount the possibility that luck plays in driving outperformance, and ignore the fact that fund performance usually reverts to the mean.

Active managers counter that they provide “downside protection,” in that their returns do not fall by as much when sharemarkets are falling. They argue that active managers smooth out the ride for investors.

However, Brycki says studies show there is no real protection during down markets.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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