Local actively managed global equity funds underperformed index fund returns in 2016 – the fourth year in a row and the sixth year out of the last 10 that active has been beaten by passive in the global equity segment.
These are the key findings of Morningstar’s latest Global Equity Sector Wrap. The researcher weighted the manager returns by asset size to reflect the influence of big funds, such as the Platinum International (which has $10.5 billion of funds under management) and Magellan Global ($9.5 billion of FUM), and compared them to the Vanguard International Shares Index Fund.
Poor performance by Platinum and Magellan last year had a big influence on overall returns. Sixty per cent of the funds in Morningstar’s sample actually outperformed the Vanguard fund (before fees).
Applying the average investment management fee of 1.25 per cent, the proportion of outperformers fell to 50 per cent.
Active managers have long argued that they protect investors on the downside but Morningstar found that this hasn’t always been the case – 2001 and 2011 being notable examples.
Morningstar says there is evidence to support active managers’ claims that periods of low volatility in equity markets, such as conditions that have prevailed since 2009, limit their opportunities to take advantage of mispricing.
“Benign periods have coincided with weaker active management performance,” Morningstar says.
“During periods of low volatility, there may be fewer instances of mispriced securities. Different market and volatility regimes may be helpful or harmful for active managers.”
Morningstar says it supports a selection of active and passive options. “This has been an extended period of relatively muted volatility and history suggests these regimes eventually reverse,” it says.
“A high fee manager may still be a worthwhile option but investors should have a greater degree of confidence in their ability to outperform.”
Among global equity large cap managers, Morningstar has awarded ‘gold’ ratings to Capital Group’s New Perspective Fund, iShares S&P 500, iShares S&P 500 Hedged, Magellan Global Equities, Platinum International Fund and Vanguard US Total Market Shares ETF.
The Vanguard fund and the two iShares funds were upgraded in Morningstar’s most recent review. Coverage of the Capital Group fund is new.
Morningstar started covering the Capital Group fund earlier this year. It says: “Though new to Australia, this strategy has a multi-decade history in the United States. Capital Group employs an internal multi-manager approach to investing, where each of the seven portfolio managers working on the strategy independently manage of slice of the portfolio.
“This strategy is best in class thanks to its exemplary stewardship of investor’s capital.”
Morningstar downgraded the CFS Wholesale Global Resources Fund, from ‘silver’ to ‘neutral’, iShares MSCI Emerging Markets (‘bronze’ to ‘neutral’) and Hunter Hall Global Value (‘neutral’ to ‘negative’).
The Hunter Hall fund was downgraded after founder Peter Hall resigned. “When the founder and dominant member of the investment team resigns, this shows a significant disregard for investors.”
The CFS fund was downgraded “because we would have anticipated a steadier outperformance against the composite index, given the investment team’s experience and strong focus on finding low-cost mining and energy companies with quality assets.”