Active Funds Crush Index

Well that’s more like it! After getting a bit wobbly to start the year, the S&P 500 has sorted itself out and set a new record. The index closed at 1848.38 in New York, which just beat out the close on December 31st, 2013 at 1848.36. That’s not an emphatic new high. But it’s a start, right?

You could almost sense the relief on Wall Street. ‘The market wasn’t ready to crack,’ says equity sales trader Michael Antonelli. ‘Clients have remained steadfast in their equities.

They’ve what? Remained steadfast in their equities? Is that the same as, say, remaining steadfast in your belief that the moon is made of cheese? The decision to buy or sell a given stock shouldn’t have much to do with belief. It should have a lot to do with price and value. But this is a market where to get ahead, you stop asking questions and start believing.

Here in Australia, the S&P ASX/200 is still down 2% year-to-date, although it was up yesterday. The index itself has been a laggard (compared to the US and Japan) ever since topping out in 2007. It’s still down over 22% from its all-time high. And active fund managers are feeling bold enough to proclaim the virtues of stock selection over passive indexing.

The average Australian equity fund manager outperformed the share market by 18% in 2013,‘ reports Salley Patten in today’s Australian Financial Review. The average Aussie fund was up 23.2% in the twelve months to December 31st, 2013, before fees. By comparison, the S&P ASX/300 was up 19.7%.

The way the figures are quoted is a bit misleading. It makes it sound like if the index was up 19.7%, and the average Aussie fund was up 37.7%. That’s not the case, of course. And if you include fees, the ‘outperformance’ of actively managed equity funds might not look as impressive.

Besides, the index was handicapped by the inclusion of Newcrest (ASX:NCM) and BHP Billiton (ASX:BHP). Newcrest fell by nearly 70% last year. And BHP, which makes up 10% of the S&P/ASX 200, was basically flat. If you didn’t own gold or the miners last year and stuck with the banks, and called that ‘active management’, you would also have outperformed the index.

Is paying for active management really worth it? Probably not. If you want to beat the index, and don’t mind taking the risk of a giant liquidity bubble, throw in a few technology and biotech stocks to your model portfolio, add all big four banks and a few smaller ones, and ditch the miners. Now raise $50 million from private clients and call yourself a fund manager.


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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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