Most Australian active fund managers in a majority of categories failed to beat their benchmarks in 2017-18, lending further ammunition to the case for passive investing in the enduring active versus passive debate.
Over the past year, general Australian equity funds recorded an average return of 12.3 per cent, leading 57.6 per cent of funds to underperform the S&P/ASX 200 Index, which gained 13 per cent, according to gross total return figures provided by S&P Dow Jones Indices.
The fund scorecard compiled by S&P Dow Jones Indices covers actively managed Australian mutual funds and compares performance against their respective benchmarks.
The results from the scorecard show “there are way too many fund managers in Australia“, said Arian Neiron, managing director and head of Asia Pacific at passive funds giant VanEck.
The survey’s message is similar to last year, he said, with pressure on fees continuing to feature in the industry as lower-fee passive funds – like exchange traded funds (ETFs) that track a benchmark – take a larger share of the Australian market.
Vanguard’s head of market strategy, Robin Bowerman, said: “I don’t think anyone is surprised by the results.
“Active underperformance is less about the investment style and more about high costs. In investing, the more you pay, the less you get.”
Mr Bowerman noted that the higher costs of active managers are particularly stark in the current low-return environment.
“If returns are lower, you can’t control performance but you can control costs,” he said. “When you’re earning 5 to 7 per cent, fees can make a significant difference.”
Small-cap and mid-cap fund managers were a better bet over the year, with returns for the group up an average of 20.8 per cent compared to the S&P/ASX Mid-Small Index, which climbed 18.8 per cent on S&P Dow Jones Indices calculations.
The picture is slightly different in the smaller cap space, noted Mr Neiron. “It’s such an inefficient market that there are lots of opportunities to add alpha.”
International funds put in a worse performance than domestic equity funds, posting an average return of 14.1 per cent compared to 15.8 per cent for the S&P Developed Ex-Australia LargeMidCap index, S&P Dow Jones Indices said.
A total of 3.4 per cent of Australian funds were merged or liquidated over the year, and 92.5 per cent of the 120 mid- to small-cap firms that started the year survived. For general equity funds, 96.7 per cent of 303 firms advanced to the 2018-19 financial year.
A total of 849 equity funds, 425 international equity funds and 116 Australian bond funds were included in the results.
The survey was released on the same day ETF fund manager BetaShares noted in its August industry review that Australia’s exchange traded fund assets under management climbed to a record high $41.5 billion, up 3.7 per cent, or $1.5 billion.
Mr Bowerman sees the shift to passive from active continuing. “There’s a long way to go in the growth in indexing. The market share is around 18 per cent. That means 82 per cent of the Australian market remains actively managed.”