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Welcome to Firstlinks Edition 584

  •   31 October 2024
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S&P Global’s SPIVA Global Scorecard has become the industry standard for assessing active fund managers against their benchmarks.

The scorecard shows that Australian active fund managers performed reasonably well in the first half of 2024. 52% of domestic equity funds outperformed their benchmarks. The number was even greater for small and mid-cap funds, with 68% posting returns better than the indices. Australian bond managers also did admirably, with two-thirds beating their benchmarks.

The news was less positive for Australian equity A-REIT managers, with almost 80% underperforming their benchmarks, and for global equity managers, where 72% trailed the index in the first half.

What accounts for the different results? It’s apparent that in local equities, better returns came from the large caps. The S&P/ASX 50 outperformed the S&P/ASX 200 as well as mid and small cap indices. It’s also apparent that momentum stocks were the huge winners of the first half of this year, returning 9.3% versus the S&P/ASX 200’s 4.2%. Therefore, to outperform, as most Australian fund managers did in local equities, they would have likely been overweight the largest companies and those with the most momentum in terms of price.

In small and mid-cap equities, S&P says that fund managers in this category tend to do well when there’s a tight spread between the performance between small and mid-caps. So it proved in the first half of the year, when the spread was minimal, and most of the managers outperformed their indices. S&P notes that the spread blew out to 3% in the third quarter, which may make the second half of the year more challenging for small and mid-cap managers.

Australian bond managers benefited by moving from local government bonds to investment grade corporate bonds. Taking on more credit risk paid off, and with credit spreads tightening further in the third quarter, it potentially augurs well for active bond managers in the second half of 2024.

Turning to Australian-based global fund managers, the six months to June were difficult. With mega-cap American tech companies vastly outperforming versus indices, it meant that managers with below benchmark exposure to these stocks invariably underperformed. Thus, the average weighted average return of Australian-based global funds was 11.8% versus the world index’s 14.8% in the first half in AUD terms.

The long-term results of Australian fund managers aren’t so good

The long-term track record of local active fund managers is less compelling. For Australian equity managers, two-thirds underperformed their benchmarks in the 2024 financial year. Over 10 and 15-year timeframes, that underperformance number increases to 82% and 85% respectively.

The statistics are similarly poor across all other categories. Some categories are better than others, though. First instance, as bond yields have normalized over the past 2-3 years, Australian fund managers have started to show their chops, with most outperforming during that time.

How did Australian fund managers compare to those overseas?

Australian fund managers performed better than their international counterparts in local equity and fixed income during the six months to June. However, their trailed in international equity.

Globally, 60% of local equity funds and more than 70% of international equity funds underperformed in the first half. Meanwhile, the majority of fixed income funds outperformed.

Again, the long-term results aren’t great. Over the past decade, more than 80% of managers in all three major categories have trailed their benchmarks.

Homing in on US fund managers

Broadly, US active fund manager performance has been pathetic over most timeframes.

In local equities, US small cap equity managers outshone the rest in the first half of 2024. 85% of them outperformed their benchmarks.

Large cap equity managers did ok. 43% did better than their index during the first half, as well as over the 12 months to June.

However, the long-term track records of US active equity managers in all categories are miserable.

In fixed income, the results are more positive in the short-term, but less so over five and 10-year periods.

What it means for the average investor

Undoubtedly, stock market conditions have been challenging for active equity fund managers of late. The outperformance of large caps both in Australia and overseas has meant managers have had a difficult time differentiating themselves and outperforming market cap weighted indices.

Ironically, ETFs have been taking market share from managed funds, yet it’s these same ETFs which may have contributed to the increasing market concentration and subsequent underperformance of fund managers.

For the average investor, the results show that small cap equities funds and fixed income funds may be your best shot for finding managers that can outperform benchmarks. Australia is lucky in having many high quality managers in these areas. However, choosing the right ones is a skill just like stock picking, and that’s a subject ripe for a future article.

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In an article two weeks ago, I wrote of how preserving wealth through generations is hard. This week, I had the pleasure of meeting one family which has managed to endure and succeed over the past 220 years. The family in question, the Schroder family, and specifically meeting with Leonie Schroder, a 5th generation family member and Non-Executive Director of Schroders PLC in London. Ms Schroder was in town to celebrate Schroders Australia's 60th anniversary. As a Firstlinks sponsor, I'd like to congratulate the firm on the fantastic milestone. 

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In my article this week, I look into how many of us start to think about our legacies as we get older, but this may not be the best way to get the most out of lives and leave loved ones in good stead. 

James Gruber

Also in this week's edition...

We hear a lot about how capitalism is failing and needs reform. That we need to kickstart the manufacturing sector. That more government subsidies are needed in a host of different areas. Stop, says Peter Swan and Dimitri Burshtein. Government isn't the solution right now; it's the problem, they suggest. They believe the recent cost of living crisis is borne of an inefficient and bloated government sector that continues to expand, hindering economic growth while fostering social and intergenerational tensions. 

Does being informed make you more prone to poor investment decisions? Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, as well as other thought-provoking topics such as three predictors of panic selling and why nurses tend to be better investors than doctors. Joseph Taylor reports.

Is near enough good enough when valuing SMSF assets at market value? Not according to superannuation regulations, which require SMSF trustees to value all assets at market value when preparing financial statements. Shelley Banton details the challenges of getting it right and the repercussions if you don't. 

British colonisation has come under heavy criticism in recent years. In Australia's case, some of that criticism is no doubt justified given what happened to Aboriginal people. However, Tony Dillon, says that we should at least be thankful for the Common Law system that we inherited from the British. It's fostered democracy and capitalism, helping to turn our country into a prosperous one. Without this legal foundation, Tony thinks our fate could have been very different.

There's been a big structural shift in Australia's labour market, with the 'care' sector significantly expanding vis-a-vis other areas. Matt Maltman analyses how it's happened and the impact that it's having on our economy.

Is there any value left in technology stocks? Platinum's Jimmy Su says there is. He believes that the real skill in investing is to be able to know when a stock priced at 30x earnings is cheap and when a stock on 10x is expensive. From this, he explains why the market is mispricing megacaps such as Amazon and Alphabet.

Lastly, in this week's whitepaper, Fidelity provides a practitioner's guide to investing in the energy transition.

Curated by James Gruber and Leisa Bell

A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by midday.

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