A new study of New Zealand equity unit trusts has confirmed that very few active managers really add value.
Several years ago two Massey researchers, Phil Boustridge and Martin Young, published a paper which made the conclusion that active managers rarely outperform the market.
That study generated a great deal of criticism and was discounted by many fund managers.
However, a new Massey study done by Lawrence Rose, Paul Gronwoller and Janet McLeod, has come up with similar findings, while at the same time addressing some of the perceived weaknesses of the earlier report.
The latest work uses style analysis to benchmark each manager against his past performance rather than using some arbitrary benchmark.
Rose says some benchmarks chosen by managers are not particularly relevant and style analysis was a more appropriate measure.
Such a technique is widely used overseas, and among its proponents are United States research house Morningstar.
The Rose study whittled the universe of New Zealand Equity unit trusts down to a pool of 19 funds with three years of performance data.
The study then separated this pool into a group of 13 funds that had a large cap focus and six that has a small to mid cap focus.
It concluded that four of the large cap funds outperformed the market, while 8 under-performed and the balance were neutral.
Of the small to mid cap group just one fund managed to outperform, and that was by the narrowest of margins.
When six years worth of performance data was used the pool shrunk to 8. Of those 8 only two beat their style benchmarks.
Rose says style analysis is useful for investors as they can see what they are getting and it is one way of seeing if a particular manager deviates from past practices.
While the study lends weight to the argument for passive management, it does not discount active management.
Rose says it is possible for an active manager to outperform the market but an investor has to be "pretty careful" when making fund manager selection.
A new study of New Zealand equity unit trusts has confirmed that very few active managers really add value.