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Smartshares: Market dip shows passive still best bet

Smartshares is pointing to market wobbles in October as proof passive management outperforms in poor market conditions, too.

Tuesday, November 27th 2018, 6:00AM 2 Comments

Markets around the world fell during the month. The MSCI All Country World Index was down 7.5%, the MSCI Emerging Markets Index down 8.7% and the S&P500 6.94%.

The NZX50 fell 6.4%.

Some active managers have argued that it is in periods of poor market performance that active managers can shine.

But Smartshares said, across the four key strategies for New Zealand investors, active managers underperformed on all of them in October.

It compared funds categorised by Morningstar as New Zealand equity, New Zealand based-global equity, Australian-based global equity large blend (the blend style is assigned to funds where neither growth nor value characteristics predominate) and Australian-based Australian equity large blend funds.

The New Zealand equity funds returned an average loss of 6.63% in October, compared to an index return down 6.4%.

New Zealand-based global equity funds returned a loss of 6.91% against an index return down 5.91%.

The Australian funds also returned on average 0.1% and 0.2% less than the index.

“Of course this data represents only one month and things can change. However, we can look back to the last bear market periods in 2000-2002 and 2008 to see how active managers fared,” Smartshares said.

It said data from S&P showed the majority of active managers underperformed the US equity market between 2000 and 2002 and in 2008.

“In both bull and bear markets, actively managed funds have in aggregate consistently failed to beat the market after fees. The short and long-term data therefore continues to show that investing a good proportion of assets in low-cost passive funds is a therefore logical choice for all investors.”

Smartshares itself provides a range of passive exchange-traded funds.

Head of AUT's finance department Aaron Gilbert said the findings were predictable.

"It is completely in line with the vast majority of a very extensive body of academic literature which finds exactly the same. In fact, worldwide, and in NZ, there is very little evidence to suggest that active investment is worth the considerable extra fees that you pay."

Tags: Active v Passive Smartshares

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Comments from our readers

On 27 November 2018 at 7:28 am Pragmatic said:
OK - so we took all of the 'active' capabilities and lumped them into one (irrespective of their varying styles, positions, philosophies etc)

We then compared this grouping to an arbitrary 'passive' index to arrive at the conclusion that passive is better than active. Since when did a comparison against an index become the measurement of client progress?

Groan - this appears like a wafer-thin attempt to justify an over-priced gateway into the world of passive - where by definition - you're behind before you start. If consumers want a true low cost passive approach to the investment world, then the appropriate research is Google, whereby gateways start at 3bps (and are rapidly heading south of that).

If industry participants still want to pursue 'passive' strategies (based largely on low fees and the ability to quarantine their own fees) during times of volatility, I'd strongly encourage them to understand human behaviours following times of loss.
On 27 November 2018 at 8:56 am coolrunnings said:
In a sell off all values fall however once the dust settles it’s the quality businesses with sustainable earnings and low levels of debt that recover first and continue to perform. For my money I’d rather be exposed to a more concentrated portfolio of high quality businesses during turbulent markets rather than the market as a whole. While I agree that many active managers have underperformed a select number of above average active managers have outperformed the market and provided valuable dowsnside protection in turbulent markets.

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