The South African equities market has experienced a volatile first half of the year, but active fund managers have failed to take advantage of the discrepancies in the market, according to S&P Dow Jones Indices (S&P DJI).

S&P DJI has released the mid-year 2015 results for the South Africa S&P Indices Versus Active Funds (SPIVA) Scorecard, revealing that 81% of actively managed South African equity funds failed to beat the S&P South Africa DSW Index over a one-year period.

The poor performance persisted over 3- and 5-year time horizons with 80% and 90% underperforming the benchmark respectively.

Zack Bezuidenhoudt, Head of South Africa and Sub-Saharan Africa at S&P Dow Jones Indices, said that “active management is not easy, and it’s definitely not easy to outperform indices year after year”.

“Many investors are now adopting a blend between active and passive management to avoid being caught out by prolonged underperformance from active managers, or missing out on returns above indices that active managers claim to offer,” he told Africa Global Funds.

Bezuidenhoudt said that active managers have to deviate from the benchmark otherwise they would be seen to be passive managers or index trackers.

“When you deviate from the index through active stock picking you take the risk that you select stocks that will do better or worse than the market,” he explained.

“This can almost be seen as taking a 50/50 chance. You can either win or lose. In South Africa, managers are being tricked by two things. Lagging performance in perceived undervalued resource stocks and momentum in perceived overvalued Industrial and financial stocks,” he said.

The South African fixed income market was mixed.

Active managers were able to beat the benchmark in the short-term bond category but could not do so in the longer-maturity diversified/aggregate bond category.
 
According to the findings,   59% of actively managed Short Term Bonds funds underperformed the SteFI Composite Index over a one-year period.

Conversely over a 3- and 5-year periods they did better with only 27% and 21% underperforming the benchmark respectively
 
For the Diversified / Aggregate Bond actively managed funds, 86% underperformed the JSE/ASSA ALBI Index over a one-year period.

Over a 3- and 5-year period these numbers were 40% and 74% respectively.
 
When asked whether asset managers should revise their strategies and spend more time on selecting "right" stocks and bonds, Bezuidenhoudt said that not all active managers follow the same strategies, just like not all indices follow the same weighting schemes.

“Investors should rather ask if they are confident that the asset managers are true to their investment strategy and if they understand they risks active asset manager take within their strategies. This is one of the benefits of indices, that they are rules based and remain consistent and transparent,” he said.
 
“In today’s globalised world where information is moving through the market faster and faster,  we could start seeing asset managers increase their stock selection from more sophisticated smart beta indices that already capture most of the quantitative assessments they already look at, freeing up time for them to focus more on other qualitative valuations,” he added.