In Morningstar's Australian Equities Large-Cap Sector Wrap, director of manager research ratings Tom Whitelaw asked the question: How Active Is Your Australian Equities Manager?
A much stronger focus on fee disclosure following the Future of Financial Advice (FOFA) reforms have led investors and advisers to ask whether they are getting value for money from their investment managers, Mr Whitelaw said.
"No one wants to be paying active fees for inactive management.
"A good way to assess if your manager really is taking differentiated calls from the index is through active share, which measures the active component of an investment portfolio in relation to an index," Mr Whitelaw said.
Morningstar's active share characteristic is scored out of 100, with an active score of 90 (for example) indicating that 90 per cent of the portfolio differs from the benchmark.
The average active share of Australian equities managers fell from 60 to 45 between 2006 and 2009. After hovering around 45 it has crept up to 48 in the last two years.
"When markets were going up and absolute returns were easy to come by, it seemed much easier to be active.
"The market’s 2007 sell-off then coincided with a sharp reduction in active share. That’s the survival instinct kicking in; you don’t get fired for losing money so long as everyone else is doing just as badly," he said.
However, over the past 24 months (to the end of June 2015) there has been a 10 per cent rise in the activeness of Morningstar's cohort of Australian equities managers, Mr Whitelaw said.
"One possible explanation is the greater focus on fees, which has resulted in more fund flow being directed to passive funds and ETFs.
"This has undoubtedly forced active managers to try to differentiate their products more clearly from the passive approaches that have been eating their lunch in recent years," Mr Whitelaw said.
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