South African equity funds fail to beat the benchmark over five years

JOHANNESBURG (Capital Markets in Africa) –  South African equity markets once again lagged global markets over the past year. This underperformance can partly be attributed to the contraction of 1.2% in the country’s GDP in the first quarter of 2016, which was principally due to a significantly lower production in platinum group metals over the period. The sense of unease was further compounded when S&P Global Ratings warned that it may strip the country of its investment-grade status. On the positive side, the South African rand stabilized and gold prices rose during the period amid global growth worries, which boosted the performance of major gold mining issues in the equity markets. Over the past one-year period, the performance of domestic equities, as measured by the S&P South Africa Domestic Shareholder Weighted (DSW) Index, trailed that of the S&P Global 1200 by about 8% in local currency terms.

Unfavorable economic news, both on the domestic and international front, was certainly one of the reasons the South African market experienced bouts of high volatility in the first half of the year. Normally, this would be rich ground for active management, as managers could utilize their stock-picking skills to benefit from the perceived discrepancies in the market. However, our report shows that a high proportion of South African equity funds invested in both the domestic and international equity markets did not keep up with their respective benchmarks over the one-year period. This pattern of underperformance persisted over the longer term as well.

Over the five-year period, approximately 86% of domestic equity funds and 96% of global funds trailed their respective benchmarks.

In regard to fixed income, the results were mixed for active management. Over a five-year period, active managers beat their respective benchmarks in the short-term bond category, but not in the diversified/aggregate bond category.

Another observation from our analysis is that the size of the fund (the amount of assets under management) appears to matter. Results from Reports 3 and 4 highlight that asset-weighted returns across the three time horizons examined were generally higher than equal-weighted returns. In addition, equity funds seem to disappear at a meaningful rate. Over the five-year period, approximately 20% of equity funds were either liquidated or merged. Fixed income funds were affected to a significantly lesser extent.

Since its first publication 14 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. For more than a decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.

Beyond the SPIVA Scorecard’s widely cited headline numbers is a rich data set that addresses issues related to measurement techniques, universe composition, and fund survivorship that are less frequently discussed but are often more fascinating. These data sets are rooted in the fundamental principles of the SPIVA Scorecard that regular readers will be familiar with, including the following.

  • Survivorship Bias Correction: Many funds might be liquidated or merged during a period of study. However, for someone making an investment decision at the beginning of the period, these funds are part of the opportunity set. Unlike other commonly available comparison reports, SPIVA Scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.
  • Asset-Weighted Returns: Average returns for a fund group are often calculated using only equal weighting, which means the returns of a ZAR 100 billion fund affect the average in the same manner as the returns of a ZAR 100 million fund. An accurate representation of how market participants fared in a particular period can be ascertained by calculating weighted average returns in which each fund’s return is weighted by net assets. SPIVA Scorecards show both equal- and asset-weighted averages.
  • Data Cleaning: SPIVA Scorecards avoid double counting multiple share classes in all count-based calculations by using only the share class with greater assets. Index, leveraged, and inverse funds, along with other index-linked products, are excluded because this is meant to be a scorecard for active managers.Ple

Please download the full report at
S&P’s South Africa Scorecard


Leave a Comment