How often does the market beat the asset manager? The consensus is that more often than not the market comes out tops.
Sanlam Investment Management managing director Armien Tyer says in the United States few managers beat the index over the long term. According to one study, in the period between 1994 to 2004 about 80% of equity managers could not beat the S&P 500.
The data is not that bad for South Africa but the country does have a problem of a very concentrated index: about 10% of stocks on the Top 40 All-Share index (Alsi40) make up almost 90% of value of the JSE and the Alsi40 is 60% resources.
“This makes it very difficult for managers to beat the index unless they take huge positions in resources and large market capitalisation. It requires a strong investment philosophy, lots of patience, the ability to stomach short-term volatility and ‘paper losses’ and a low level of trading,” says Tyer.
It is possible to beat the index through momentum trading and investing but this too is a rare skill.
Investment strategist Charles de Koch says with the commodities boom of late and the narrowness of the market it has been difficult for active managers to beat the market.
When looking back over longer periods, the better asset managers have managed to beat the indices.
Yashin Gopi, a qualitative analyst for Cadiz, says this issue is closely linked to the debate about whether one should invest in a passive index-tracking fund or an actively managed fund.
There are strong proponents on both sides of the argument, with each side claiming victory at certain times depending on the current out- or underperformance of active managed funds in the market.
“The situation in South Africa is strongly linked to the performance of resource shares. In South Africa fund managers are averse to the dominance of resource shares on the Alsi.”
This is perhaps justified, as this concentration effect is accompanied by extra risk.
Local fund managers tend to have a lower weighting of resource shares in their portfolios.
Gopi says that when resource shares perform well (relative to financial and industrial shares), active funds tend to underperform the Alsi and vice versa.
The question of how often the market beats South African asset managers is largely a question of the relative performance of resource shares and less a reflection of the fund manager’s skill.
One can assess the validity of this by examining the average fund in the general equity category of the unit trusts relative to the Alsi, over each quarter since September 1996.
The results of this analysis can be found in the attached graph, represented by the red bars.
The grey-shaded areas of the graph depict periods when resource shares outperformed financial and industrial shares.
In these periods we would expect the average General Equity fund to underperform the ALSI (the red bars would point downwards). The white shaded areas depict periods when Financial and industrial shares outperformed resource shares, and we would expect the average eneral Equity fund to outperform the ALSI (the red bars would point upwards).
From the graph, one can generally observe that during periods when Resources perform well (the grey shaded areas), the average fund in the General Equity category underperforms the ALSI (the red bars point downwards).
One can also see that that during periods when Financial & Industrial perform well (the white shaded areas), the average fund in the General Equity category outperforms the ALSI (the red bars point upwards).
In fact, our proposed explanation for the performance of funds relative to the market is correct for 37 out of the 47 quarters, i.e. 79% — confirming the earlier statements
Saville says Cannon Asset Managers research that value stocks can constantly beat the market, therefore value managers are in the best position to achieve this, whereas growth stocks will tend to track or even underperform.
Over a three-year period, the market outperforms 75% of active managers, on a global basis.
“However, not all portfolios are born equal — the chances of beating the market are best where the active investment manager constructs portfolios that are made up of stocks that suffer from price depression, trade at a discount to the market and, ideally, are neglected. “More to the point, the results of Canon’s study demonstrate that investing in portfolios of so-called value stocks has delivered results that are materially and consistently ahead of the market over many years; in other words the outcome is not spurious or random.