The majority (54 per cent) of funds across all Australian fund categories have 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 active managers across developed equity markets, with the outperformance of mega caps resulting in a high proportion of index constituents beating their benchmarks.
In particular, 72 per cent of actively managed global equity general funds trailed the S&P World Index’s total return of 14.9 per cent, posting an asset-weighted average return of 11.8 per cent.
As the country’s local equity market sets the bar significantly lower, with a 4.2 per cent return for the S&P/ASX 200 over the same period, Australian domestic equity funds fared slightly better.
Namely, 48 per cent of Australian equity general funds underperformed the benchmark, but this figure becomes 66 per cent when looking at one-year returns to June 2024.
Vanguard chief investment officer Duncan Burns described the result as “dismal”.
“But the story gets even worse over longer periods,” Duncan highlighted, noting that, over the last three financial years, 70 per cent of Australian equity general funds have underperformed their assigned benchmark, with this number surging to more than 80 per cent after 10 years.
“This isn’t just an Australian phenomenon. The global SPIVA scorecard shows 75 per cent of US active managers underperformed the S&P 500 Index over the first half, as did 73 per cent of active managers against the S&P World Index,” the CIO said.
According to Burns, what the SPIVA scorecard really highlights is that “most active fund managers are not talented enough or sufficiently different to outperform the returns from the share market”. This, he said, explains the rapid acceleration of investor inflows into index-tracking funds.
“Put bluntly, Australian investors are increasingly voting with their feet because they’re realising that using an index fund to get the return from the share market is a much better alternative than using active managers that are highly likely to underperform the market,” he said.
Locally, the lion’s share of investor inflows into exchange-traded funds (ETF) continue to be directed into index funds, now accounting for more than 91 per cent of total Australian ETF industry assets.
“There’s huge scope for Australian index funds, and frankly, there are a lot of Australian investors who could improve their retirement and investment outcomes by dialling up their index exposure through index ETFs,” Burns said.
Active management bright spots
On the flipside, less than a third (32 per cent) of Australian equity mid-cap and small-cap funds underperformed the S&P/ASX Mid-Small (3.1 per cent).
“The Australian equity mid- and small-cap fund category had the lowest historical underperformance rates when the return spread between the S&P/ASX MidCap 50 and S&P/ASX Small Ordinaries was low, suggesting a predilection for funds to seek excess returns among the smallest stocks,” S&P Global said.
“We will continue to observe how Australian mid- and small-cap managers navigate the potential challenges and opportunities remaining in 2024.”
Meanwhile, many active managers in the Australian bonds category fared better than other counterparts..
Following a record low underperformance rate (26 per cent) in 2023, only one-third of funds lagged the 0.2 per cent return of the S&P/ASX Australian Fixed Interest 0+ Index in the first half of 2024.
This number falls to only a quarter when looking at one-year returns.
“With credit spreads tightening further as of the end of Q3 2024, active bond managers appear to be on track for another strong year,” the report said.
