Managed Funds Versus Index Funds

Recently, the S&P Dow Jones released their SPIVA Australian Scorecard for the year ending June 30, 2018. This regular scorecard reports on the performance of Australian actively managed funds versus the relevant benchmark index for each of those funds, and it may provide some insights to finally put the debate to bed.

The report notes that while the S&P/ASX 200 saw an increase of nearly 13% in the year ending June 30, 2018, Australian large-cap equity funds only managed to average a 12.3% increase. Here’s a quote directly from that report:

“In the one-year period ending June 30, 2018, the majority of Australian funds in most categories underperformed their respective benchmarks, apart from the Australian mid- and small- cap category. However, the yearly active versus index figures varied across market cycles without consistent trends”

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Managed funds vs index funds: The results

Here are some findings from the SPIVA ScoreCard concerning the Australian market:

• Out of all Australian equity general funds:
  • 68.69% underperformed against the S&P/ASX 200 on a 5-year basis
  • 67.32% underperformed against the S&P/ASX 200 on a 3-year basis
  • 57.63% underperformed against the S&P/ASX 200 on a 1-year basis

• Out of all Australian Equity Mid- and Small-Cap funds:
  • 70.71% underperformed against the S&P/ASX Mid-Small Index on a 5-year basis
  • 70.37% underperformed against the S&P/ASX Mid-Small Index on a 3-year basis
  • 44.92% underperformed against the S&P/ASX Mid-Small Index on a 1-year basis

• Out of all Australian Bond funds:
  • 82% underperformed against the S&P/ASX Australian Fixed Interest 0+ Index on a 5-year basis
  • 79.25% underperformed against the S&P/ASX Australian Fixed Interest 0+ Index on a 3-year basis
  • 69.09% underperformed against the S&P/ASX Australian Fixed Interest 0+ Index on a 1-year basis

• Out of all Australian Equity A-REIT (real estate investment trusts) funds:
  • 79.73% underperformed against the S&P/ASX 200 A-REIT Index on a 5-year basis
  • 60.81% underperformed against the S&P/ASX 200 A-REIT Index on a 3-year basis
  • 91.30% underperformed against the S&P/ASX 200 A-REIT Index on a 1-year basis

Related articles: What are REITs?

But, is there more to the story?

The obvious conclusion that can be drawn from SPIVA’s findings is that passive funds are likely to out-perform their managed counterparts, possibly making them a safer and more prudent addition to some investor’s portfolios.

However, it could be unwise to discount actively managed funds based solely on this data. Active funds are handpicked with risk management in mind. Therefore, during times of market volatility they could be your saving grace. It is also worth noting that markets are cyclical and while at the moment passive investments are coming out on top, at some point this could shift as it has done in the past. After all, it’s important to keep in mind that past performance isn’t a guarantee of future returns.

What to consider before investing in active managed funds

If you’re keen to put your money in an active managed fund, remember to consider fees because they can eat into your returns. Actively-managed funds tend to charge higher fees for the privilege of hand-selected investments, along with more staff, more analysis and more active trading.

There will always be fund managers who have superior investment-picking skills. So, if you can take away one lesson from this data, it should be to carefully select your fund manager as they are not all created equally.

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