The majority (54%) of funds across all Australian fund categories underperformed their assigned benchmarks in the six months to June 2024, new data from SPIVA has revealed.
According to SPIVA’s Global Scorecard, the first half of the year proved to be a particularly challenging market environment for managers active in developed equity markets, with the outperformance of mega-caps driving a high proportion of index constituents outperforming their benchmarks.
In particular, 72 percent of actively managed general global equity funds lagged the S&P World Index’s total return of 14.9 percent, posting an asset-weighted average return of 11. 8 percent.
While the country’s local stock market sets the bar significantly lower, with the S&P/ASX 200 returning 4.2 per cent over the same period, Australia’s domestic equity funds fare slightly better.
Namely, 48 per cent of general Australian equity funds underperformed the benchmark, but this figure rises to 66 per cent when looking at one-year returns to June 2024.
Duncan Burns, Vanguard’s chief investment officer, called the result “dismal.”
“But it gets even worse over longer periods of time,” Duncan said, noting that over the past three financial years, 70 per cent of Australian general equity funds have underperformed their benchmark. assigned, this figure rising to more than 80 percent after 10 years.
“It’s not just an Australian phenomenon. The SPIVA Global Dashboard shows that 75 percent of U.S. active managers underperformed the S&P 500 during the first half of the year, as did 73 percent of active managers compared to the S&P World Index,” said the IOC.
According to Burns, what the SPIVA dashboard really highlights is that “most active fund managers are not talented enough or different enough to outperform equity market returns.” This, he says, explains the rapid acceleration of investor inflows into index funds.
“Simply put, Australian investors are increasingly voting with their feet because they realize that using an index fund to get stock market returns is a much better alternative than using active managers who are very likely to underperform the market,” he said. said.
Locally, the lion’s share of investor flows into exchange-traded funds (ETFs) continues to be directed towards index funds, which now represent more than 91 per cent of total assets in the Australian ETF sector.
“There is huge potential for Australian index funds and, frankly, many Australian investors could improve their retirement and investment outcomes by increasing their exposure to indices through index ETFs,” Burns said.
Strengths of active management
On the other hand, less than a third (32%) of Australian mid- and small-cap equity funds underperformed the S&P/ASX Mid-Small (3.1%).
“The Australian mid and small cap equity fund category had the lowest historical rates of underperformance when the yield spread between the S&P/ASX MidCap 50 and the S&P/ASX Small Ordinaries was small, suggesting a predilection of funds to seek excess returns among the smallest. stocks,” S&P Global said.
“We will continue to observe how Australian small and mid-cap managers navigate the potential challenges and opportunities that remain in 2024.”
At the same time, many active managers in the Australian bond category have held up better than their peers.
After a record underperformance rate (26%) in 2023, only a third of funds lagged behind the 0.2% return of the S&P/ASX Australian Fixed Interest 0+ index in the first half of 2024 .
This figure drops to just a quarter when looking at one-year returns.
“With credit spreads tightening further at the end of the third quarter of 2024, active bond managers appear to be on track for another strong year,” the report said.
