Clearly there is cause for active managers to engage in some introspection. If three quarters of them fail to beat the market over five years, and they are all out-performed by exchange-traded funds over all time periods, what are they charging investors to do?
This is particularly true in light of a second finding of the SPIVA scorecard, which is that when one asset-weight returns, active managers actually perform better. Over five years, the average South African equity fund returned 11.39% when all funds are equally weighted, but that increases to 12.09% when one takes an asset-weighted average.
What that shows is that the majority of under-performers are smaller funds. This is an issue that is becoming an increasing concern in the industry, where there is a predominance of small, white-labelled funds that struggle to add any value.
What is becoming increasingly critical is that the best active managers, both big and small, find compelling ways to escape these generalisations. There are outstanding fund managers in South Africa, but do they have the right proposition?
Nobody can guarantee out-performance, particularly over the short term. Making that one’s selling point, and charging for it in the form of performance fees is therefore questionable at best.
What active managers should rather be selling is their ability to manage risk, invest sustainably, and produce returns that show low correlation to the market. Admittedly that requires investors to also be more perceptive and aware of more than just ranking tables, but in a world that is embracing index tracking more and more, it seems inevitable.
Investors will increasingly refuse to pay active management fees for closet index trackers or chronic under-performers. They will demand real value propositions and managers that reflect their own values.
The challenge to the South African unit trust industry is to find ways to make their offerings relevant and appealing. Those that do so will be the future of the market.
