Less than 1 per cent of actively managed equity funds have outperformed the growth at a reasonable price (GARP) benchmark over the past 10 years, with similar levels of underperformance seen over the past 12 months, according to research released by Global X ETFs Australia.
The exchange-traded fund (ETF) provider pointed out many active funds underperform broad market indices such as the S&P/ASX 200 over the long term and the latest “S&P Indices versus Active (SPIVA) Report” for the local market indicated from 75 per cent to 95 per cent of equity funds do not beat that benchmark over a 10-year period.
Global X ETFs Australia senior product and investment strategist Marc Jocum said its analysis found that when using the GARP benchmark, the failure rate was closer to 99 per cent over 10 years and over 93 per cent over one year.
Its analysis compared more than 900 Australian large-cap and global equity funds to the S&P/ASX 200 GARP Index and the S&P World ex Australia GARP Index and found less than 1 per cent of funds outperformed their respective GARP benchmarks over the longer time period in both the Australian and global equity categories.
Additionally, the research found underperformance was not restricted to larger fund managers and smaller funds with less than $100 million underperformed the GARP benchmark by the widest margins at an average of 6.9 per cent globally and 4.6 per cent in Australia.
In comparison, funds with $100 million to $500 million had an average 10-year global fund underperformance of 5.6 per cent compared to the GARP benchmark and 4.6 per cent Australian fund underperformance.
This figure reduced as the size of the fund continued to increase, with those between $500 million and $1 billion underperforming by 5.2 per cent and 3.5 per cent, respectively, while funds with more than $1 billion underperformed by 4.3 per cent and 2.4 per cent, respectively.
Jocum said the research suggested investors should consider which benchmark they are using to evaluate fund performance and whether they are paying too much for active management.
“Many active funds tilt toward factors like growth, quality or value, so comparing them to a plain-vanilla broad index doesn’t tell the full story. When you test them against a benchmark that actually reflects their style, the performance gap widens dramatically,” he said.
“Investors don’t need to pay high fees to access the same investment factors that drive these results.
“GARP ETFs offer diversified exposure to growth, value and quality for as little as 0.25 to 0.30 per cent per year so it may be worth asking your active manager how they compare to a GARP index instead of their prospectus benchmark.”
