Do you have less than 10 years to retirement and are relying on picking the right shares to build your wealth?
STOP. You are wasting your time. Here is why:
S&P Global run a scorecard called the “S&P Indices Versus Active Funds” (aka SPIVA). This scorecard tracks the performance of active managers in the USA, Europe and Australia against their benchmarks since 2002. The benchmark is a measure of what return the overall market has delivered and sets a level of return of which the manager must beat to justify their fees.
The results are shocking1:
- When we compare Australian equity active fund managers to the S&P/ASX 200 index (The top 200 companies on the Australian stock exchange) after one year, 52.60% underperformed the index AFTER fees. After three years 54.61% underperformed the index and after five years a whopping 70.96% underperformed the index.
- Australian active bond fund managers fared worse compared to the S&P/ASX Australian Fixed Interest Index. 100% of managers underperformed the index after one year. 82.35% underperformed after three years and 86.27% underperformed after five years.
- Australian international equity fund managers could not beat the S&P/ASX Developed Ex-Australia Large/Mid Cap Index (What a mouthful – meaning all the overseas developed country share markets outside of Australia). 67.31% of managers underperformed the index after one year. 85.15% underperformed after three years and 89.55% underperformed after five years.
The exception seems to be Australian equity mid-cap to small cap managers (those managers who select stocks in companies that are ranked 1000 to 200 in market valuation). Compared to the S&P Mid Small Index, 55.21% underperformed the market after one year. 35.15% underperformed after three years and 29.17% underperformed after five years.
So what can we learn from the above? A passive approach using Exchange Traded Funds (ETF) will be much cheaper and achieve the same if not better result than most active managers over the long-term.
An ETF is simply a basket of underlying shares that mimic the index. For example, the iShares Core S&P/ASX 200 ETF invests directly in the top 200 companies on the Australian stock exchange. The management fee is 0.15%. The dividend yield is 7.29% (Or 8.67% after franking credits). In one transaction you own the top 200 companies on the Australia stock exchange and all the dividends and franking credits flow through to you. Your units in the ETF can be traded daily on the stock exchange like any other share. One bad return from one or several shares is unlikely to cause excessive volatility to your portfolio.
The average management fee for most Exchange Traded Funds is 0.07% to 0.45%. The average fee for most active managed funds is 1.2% to 2%.
So, if you are in your last two years of retirement, place most of your portfolio in ETF’s and stop worrying about picking individual stocks or fund managers.
This will enable you to focus your time and efforts on maximising your returns from something else you can control – your job!
The reduced stress factor from less portfolio volatility will also provide better sleep at night.
1. S&P Dow Jones Indices/McGraw Hill Financial – SPIVA Australia Scoredcard, Mid-Year 2015.
Media enquiries:
Andrew Zbik
Senior Financial Planner
Omniwealth
t: (02) 9112 4316
m: 0422 038 253
andrew.zbik@omniwealth.com.au
www.omniwealth.com.au
Source:
– Returns on US and Western European equities and bonds during the past 30 years were considerably higher than the long-run trend
– Our analysis suggests that over the next 20 years, total investment returns including dividends and capital appreciation could be considerably lower than they were in the past three decades.
– Most investors today have lived their entire working lives during this golden era, and a long period of lower returns would require painful adjustments. Individuals would need to save more for retirement, retire later, or reduce consumption during retirement, which could be a further drag on the economy.
– One reason is technology, which makes it much easier to trade large numbers of different assets at the same time, and to construct baskets of assets that track indexes closely.
– Another factor might be low interest rates and declining returns, which make asset-management fees more salient and painful, pushing people toward low-fee passive-investment vehicles.
– One answer is in a 1976 paper by Sanford Grossman and Joseph Stiglitz. These economists realized that if it costs money and time to get information about asset fundamentals – like a company’s future earning, or a country’s chance of default – then financial markets can’t be perfectly efficient. If they were, there would be no compensation for gathering information, so no one would bother to do it, with the result that markets would come totally unmoored from reality.
– The bane of active managers’ lives is the S&P Indices Versus Active Funds (SPIVA) Scorecard which has tracked their performance against their benchmarks since 2002.
– Active managers can enjoy short-run success in certain markets. For example, 88% of UK equity active funds beat their benchmark over one year.
But 52% failed to succeed over a full five years and the record only gets worse in other categories.
78% underperformed the US market over one year and 95% failed over five.
Active managers even faltered in relatively inefficient markets where they claim their stock-picking skills given them an advantage.
72% failed to beat the emerging markets index over one year, rising to 74% over five.
And while 51% of active managers outperformed UK small-cap equity over one year, their performance soon deteriorated as 78% failed over five years, rising to 81% over ten.
This abject failure is not restricted to UK fund managers. 97% of Euro denominated active funds failed to beat the global equities benchmark over 10 years.
And 82% of US large cap managers failed to beat the S&P 500 over the last decade.
The worst performance of all? The 100% of active managers who lost to the Dutch index over five years.
– The S&P Persistence Scorecard reveals that no top quartile large or mid cap funds maintained their position over the last five years. 27% of the top-ranking funds dropped into the bottom quartile of the table between 2011 and 2015.