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Active fund managers struggle as market heavyweights outperform
The outperformance of market heavyweights, such as the banks domestically and big technology stocks internationally, is still making life difficult for active managers, with research showing most of these funds (54 per cent) across all Australian categories underperformed their assigned benchmarks in the six months to June 30, 2024.
As highlighted in the S&P Indices versus Active (SPIVA) scorecard, the first half of 2024 proved to be a particularly challenging market environment for active managers across developed equity markets as the outperformance of the largest companies resulted in a high proportion of index constituents underperforming their benchmarks.
In Australia, 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 measured in Australian dollars.
Sue Lee, S&P Global’s Asia-Pacific head of index investment strategy, said Australian domestic equity funds had relatively better results, with the country’s equity market setting the bar significantly lower with a 4.2 per cent return for the S&P/ASX 200.
“A slim minority (48 per cent) of Australian equity general funds underperformed the S&P/ASX 200, while less than one-third (32 per cent) of Australian equity mid and small-cap funds underperformed the S&P/ASX Mid-Small Index (3.1 per cent).
“Australian equity A-REIT funds were an exception, with 79 per cent of funds underperforming, partially driven by a high portion (15.4 per cent) of funds failing to survive.”
Australian equities had a slower start to the year than other developed markets, but they picked up steam in the third quarter, with the S&P/ASX 200 posting a healthy 12.3 per cent gain in the three months to September 30, 2024.
“With the large-cap segment’s outperformance reversing and 56 per cent of the S&P/ASX 200 constituents underperforming the index at the end of the third quarter, market conditions remain fairly neutral for active managers in the Australian equity general category.”
For historical context, the annual underperformance rate of the Australian equity general funds has averaged 60 per cent for the past 15 years, while 85 per cent of funds underperformed over the entire 15-year period.
As noted in the SPIVA global mid-year 2024 scorecard, the Australian equity mid and small-cap fund category had the lowest historical underperformance rates when the return spread between the S&P/ASX Mid-Cap 50 and S&P/ASX Small Ordinaries was low, suggesting a predilection for funds to seek excess returns among the smallest stocks.
Lee said that with the spread widening in the third quarter, SPIVA would continue to observe how Australian mid and small-cap managers navigate the potential challenges and opportunities remaining in 2024.
In line with the US dollar and Euro-denominated fixed income market, the Australian fixed income market provided favourable grounds for active managers in the six months to June 30, 2024.
She said that the excess return obtained by moving from Australian government bonds to investment grade corporate bonds, as measured by return spreads between the S&P/ASX Corporate Bond Index and the S&P/ASX Australian Government Bond Index series, was positive across maturities.
“This suggests that bond managers would have been rewarded for their conventional strategy of taking more credit risk than the benchmark. With credit spreads tightening further at September 30, 2024, active bond managers appear to be on track for another strong year.”
