Active Equity Unit Trusts Still Struggle to Beat Their Benchmark Targets
The latest report “Quest for Alpha” (December 2010) by independent research specialist Daniel Wessels, DRW Investment Research, continues to show the long-term underperformance of most actively managed unit trusts.
Wessels finds that only below 12% (5 year) to 22% (1 year) of unit trusts were able to outperform the SWIX Index, which is the typical institutional benchmark used for measuring investment performance.
Table 1
|
Equity Unit Trusts versus the Benchmarks |
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|
Equity Funds |
1-Year |
3-Year |
5-Year |
7-Year |
10-Year |
|
|
Number of funds |
97 |
83 |
63 |
50 |
38 |
|
|
Best performing fund |
26,0% |
14,5% |
18,5% |
24,5% |
29,9% |
|
|
Worst performing fund |
1,0% |
-11,7% |
8,0% |
14,7% |
13,3% |
|
|
Top quartile |
20,6% |
6,8% |
14,5% |
20,7% |
20,2% |
|
|
Median |
18,3% |
5,1% |
12,9% |
19,5% |
17,8% |
|
|
Bottom quartile |
16,5% |
3,1% |
11,4% |
17,9% |
15,8% |
|
|
Average |
18,2% |
4,8% |
12,9% |
19,5% |
18,4% |
|
|
Benchmark: ALSI |
19,0% |
6,5% |
15,2% |
21,0% |
18,1% |
|
|
% Funds outperforming ALSI |
37% |
33% |
15% |
26% |
49% |
|
|
Benchmark: SWIX |
20,9% |
7,1% |
15,1% |
21,6% |
|
|
|
% Funds outperforming SWIX |
22% |
16% |
12% |
15% |
|
|
|
1. |
Equity unit trusts in categories: General, Growth and Value Funds |
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|
2. |
Total Returns Annualised |
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|
3. |
Source: DRW Investment Research |
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Looking at the 3 year performance period - which is typically used to determine medium-term performance - of the 83 equity unit trusts in the Survey, only 14 funds or 16%, outperformed the FTSE/JSE SWIX Index. Similar results pertain to the 5-7 year time periods, which longer-term time periods normally allow for active managers to adjust to any cyclical forces in the market.
Mike Brown, Managing Director of etfSA (the full Quest for Alpha report is available on the etfSA website, http://www.etfsa.co.za/), comments that “unit trusts, whether they look to perform at the market average (general funds), or look to exploit market inefficiencies (growth or value funds) still mainly fail to beat the market.”
Brown believes that “this places an unfair burden on the investor, or their advisors, as they need to identify amongst the overwhelming number of unit trusts available, which funds will deliver superior performance. The great majority of unit trusts, 80% or more, fail to even match the average market performance, some by a substantial amount. Choosing the wrong unit trust can have disastrous effects on long-term wealth creation”
Wessels also identifies in his research report the individual funds that have performed well over the 3-7 year period. If Exchange Traded Funds (ETFs) are included in amongst these individual funds, there are clearly passive products which are now competing very successfully in performance with the very best unit trusts.
Table 2
|
Top Performing Equity Funds 3 Year Period (Total Return per Annum) |
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|
Product |
Product Type |
% Return |
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|
Satrix DIVI Plus |
ETF |
16,31% |
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|
Nedbank Value |
Unit Trust |
14,46% |
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|
Marriot Dividend Growth |
Unit Trust |
14,38% |
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|
Discovery Equity |
Unit Trust |
12,63% |
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|
Absa Select Equity |
Unit Trust |
12,49% |
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|
Aylett Equity AB |
Unit Trust |
11,52% |
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|
Proptrax |
ETF |
11,45% |
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|
Coronation Equity |
Unit Trust |
10,80% |
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|
Investec Value |
Unit Trust |
10,50% |
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|
Satrix INDI 25 |
ETF |
10,22% |
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|
Source: |
DRW Investment Research. etfSA Monthly Performance Survey. |
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Even in the individual performance stakes, ETFs, which seek to only deliver the average market performance, which is measured by the weighted index component shares they track, are appearing more and more frequently amongst the top performing funds.
Brown says that “investors in South Africa generally assume too high a risk and pay far more fees than are necessary, by investing only in actively managed unit trusts. Low costs, transparent and flexible ETFs should form at least 50% or more of any medium to long-term investment portfolio.”
