How can the latest SPIVA Scorecard help inform investors in South Africa? S&P DJI’s Tim Edwards dives into the latest SPIVA results and the trends driving South Africa’s evolving active vs. passive landscape with Asset TV’s Mosidi Modise.
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Mosidi Modise:
Hello everyone, and a warm welcome to Tim Edwards, Ph.D, who is joining us from S&P Dow Jones Indices. He's here at our shores from London and is going to be telling us about the SPIVA® Scorecard, a remarkable piece of research that could be very useful to you all thinking about when to go for an active versus passive strategy.
So, I don't want to take your thunder away. I just want to welcome you, Tim, here to our shores and thank you so much for visiting us.
Tim Edwards:
Thank you so much. It's a great pleasure to be here.
Mosidi Modise:
So, Tim, to set the stage, what is SPIVA and what insights can it provide?
Tim Edwards:
Sure. So, SPIVA is an acronym. It stands for S&P Indices versus Active. And, it's the brand name for a series of global reports that my team produces, looking at the performance of actively managed mutual funds around the world. The first edition of the Scorecard was produced in the U.S. over 20 years ago. The South Africa edition has been running for around a decade, and the latest figures run up to the midway point of 2025.
And, what we hope to do is, rather than settle the debate on active versus passive, because I don't think that that will ever be settled, what we hope to do is inform that debate with good data on how indices and active funds are performing in different categories around the world, equities and fixed income, international and domestic, and provide our readers with the latest statistics on how active is faring around the world.
Mosidi Modise:
Thanks for the context, Tim, and I think it's very topical given everyone has this debate going around where, what the cost of alpha should be, should it be in passive or active strategies?
So, my question to you is, how do you select these benchmarks from each fund category to ensure that they accurately represent their investment objectives, first of all, and then also the risk profiles for the various categories?
Tim Edwards:
It's a really important question, actually. So, what we do, within the team, is we'll look at the whole active fund universe, we'll look at their aggregate performance, we'll look at their holdings, and we'll also look at how they describe themselves. And, then, we will look across our range of indices and try and pick the one that is the most appropriate as a representation for what the active managers are doing, or, at least, what their category says they're doing. But, there are nuances.
So, for example, in our South Africa SPIVA report, since we began producing that report, in one of the categories, domestic equities, we actually report the performance of active funds differently against two different benchmarks. One is the S&P South Africa 50, which I think is widely recognized as a benchmark, a market reference point, a barometer, something that people look at to see how the overall market is doing. And, many funds and investors will compare their performance to the S&P South Africa 50. But, it's not necessarily fully representative of what the active funds do. 50 stocks is relatively narrow compared to the broad, or, everything that's available. And, until very recently, the S&P South Africa 50 also included a relatively hefty allocation to stocks that were listed elsewhere, i.e., they're not available necessarily to domestic shareholders.
And, so, as well as the S&P South Africa 50, we will continue today to report the performance of active funds versus the S&P Composite 1500®, so, it's a broad universe, domestic shareholder-weighted index. So, we actually provide two benchmarks in that one, and that reflects that, actually, the benchmark does matter, and most of the time, there is a right answer. Sometimes, there are two acceptable answers.
Mosidi Modise:
And, now, the next question is to just drill a little bit deeper on the SPIVA Scorecard. You have one specific for South Africa. Tell us a little bit about that.
Tim Edwards:
Yes, so, we produce the report every six months. It's quite a long report because we provide all sorts of different information on the fund industry. How differently are funds performing? What's their survivorship rate? How many beat the benchmark before and after adjusting for risk? But, the statistics that are most commonly picked up by investors in the media is the most simple one, which is, over the most recent time horizon, so, in the case of the latest report, half year to the midpoint of 2025, how many actively managed funds were ahead or behind of their benchmark?
The latest Scorecard, the results, I can summarize them as follows. In the short term, we saw a real mix. In South Africa, in particular, we saw strength from very large companies, which are weighted heavily in benchmarks, and a very high proportion of actively managed funds underperformed. In fact, even getting into the top quartile of performance wouldn't have beat the S&P South Africa 50, wouldn't have beaten either the S&P South Africa DSW Capped Index.
For global equities, it was a little more balanced. There was a lot of tariff volatility, there were opportunities for outperformance. But, it wasn't easy. And, we saw a slim majority, 55%, of funds underperforming.
And, then in fixed income, we saw really different results. So in ultra-short-dated money-market-like funds, short-term bonds, we saw a very high proportion outperforming, just 13% underperforming. And, almost the opposite in the broader bond market. So, a majority underperformance, a strong majority underperformance, 81%, I believe, underperforming the S&P Sovereign South Africa Bond Index.
Mosidi Modise:
Those are very great insights and data points that support my next question, Tim. So, what appears to be driving this outperformance of short-term bonds, particularly given the current economic environment globally and domestically for South Africa, and why is this story so different for domestic equities?
Tim Edwards:
So, there are some things that are true globally in fixed income when it comes to active versus passive. And, they really are drawn into sharp focus in South Africa, in the short-term bond category, in particular.
So, our benchmark for the short-term bond category is the STeFI Composite. It's an ultra-high-quality money market rate. What happens, somewhat systemically, in that fund category in South Africa and, to a great extent, globally, is that the benchmark is ultra high quality. What many managers do is they will include a mix of high quality and lower quality, higher-yielding, instruments. And, provided that there's no major downturn, those high-yielding instruments will deliver a higher return. We have seen in South Africa, even this year, in early 2025, there have been a few occasions where one or another fund has suffered great challenges from the strategy of looking for more risk.
But, overall, if you were looking for a bit more credit risk, you weren't rewarded in the short-term bond category. This is where the additional level of the report actually comes and can be more interesting. And, what I mean by that, so, I mentioned that we do how many funds beat the index. We also do a risk-adjusted version of that. So, if you control for the volatility, how many beat the index on a risk-adjusted basis. And, of course, your money market rate does not have a lot of it. It has some, but not very much, volatility.
If you're taking on junkier, high-yielding securities, you will have more risk. And, what you actually see over the long term and in the short term is a flip. So, short-term active funds are outperforming on an absolute performance basis. Once you control for risk, it goes from majority outperformance to vast majority underperformance. And, that's where I think, sometimes, it is really worth going beyond the headline numbers and having a look and asking, what's really driving this?
Mosidi Modise:
On the STeFI Composite, you've brought such rich insights that I haven't really thought about, like, what's driving that performance within that benchmark? And, another interesting thing that maybe a lot of people don't talk about, and you outlined it in the report, is that, over the past 10 years, 40% of South African equity funds have either merged or have been liquidated, and 35% across all categories have just disappeared. That's interesting. What do you believe are the main drivers behind this trend? And, how is it reflected in the SPIVA Scorecard?
Tim Edwards:
This actually gives me an opportunity to highlight something unusual about our SPIVA Scorecard, which is actually super important. In order to calculate it, what we do is we actually look at the funds that were available 1 year ago, 3 years ago, 5 years ago, 10 years ago, to report our statistics. And, the fund industry generally does not have, anywhere in the world, an awful lot of patience for underperformance. And, if you look at the initial sample set of the funds that were available 10 years ago, if you don't account for the 30 or 40% that don't exist anymore, you're really misrepresenting what your chances were 10 years ago of picking a fund that would outperform and survive.
Mosidi Modise:
Why is there this sort of lack of patience?
Tim Edwards:
I think it's a really interesting question. I think it's partly investor driven. I think we all know that patience can be rewarded, but we're often challenged with our own stakeholders in continuing to hold underperforming investments. I think there's also a sort of market dynamics here. Growth doesn't always do well. Value doesn't always do well. And, funds suffer not from a lack of skill, but, from just the market circumstances they are not best positioned to navigate.
So, there's a real confluence of factors, but, what I would emphasize is including the whole universe, and thinking about your choice today or your choice 10 years ago, accounting for survivorship is really important in properly understanding the chances you have in picking those, and there always are some, those managers who really justify their fees and beat the index.
Mosidi Modise:
And, so, if you're a financial advisor and wanting to really leverage this as a tool for successful clients, what would you say to them?
Tim Edwards:
I think there are two ways that you can use the SPIVA Scorecard. If you're someone who's, we mentioned it a bit, if you're someone who's really convinced and very comfortable selecting active funds, what the Scorecard can do is it can help show where you were facing particular challenges to your clients, i.e., if you had a U.S. equity fund that underperformed over the last 10 years. It's helpful to know that there were extremely few U.S. equity funds that did so. And, maybe your pick wasn't that bad. Maybe it was well above average. It just wasn't above the index because it was a really tough time. I think if you are using passive funds exclusively, SPIVA can help you explain why that choice has been made.
There's a sense of index investing is settling for average. And, what SPIVA shows is, no, not necessarily. Actually, you might be a little above average if you look at the broader industry. And, if you're someone who is neither dogmatically active or dogmatically passive, the SPIVA Scorecards show you where active is working and where it isn't. And, it helps you think about where you want to prioritize your efforts in finding great managers, and where, instead, you might look for an index exposure because it proves very hard to beat the index.
Mosidi Modise:
And, just to bring it all together, as my final question, Tim, we recognize that the adoption of passive investment strategies varies across different markets. And, in South Africa, it's definitely very popular, and they're on the uptick. Have you observed any global trends that may be pertinent to South Africa worth mentioning?
Tim Edwards:
I think so. Certainly there are echoes of the global trend toward index-based investing, passive investing, that are being manifested in South Africa. It is popular. We're also seeing increased interest in the fixed income space, which is, again, something that we're seeing echoed around the world.
You're also seeing an evolution from the role of a wealth manager in being primarily about selecting the right instruments, evolving from that to more of a collaborative attempt to determine the right goals, the right objectives, the right risk levels, and then use a toolkit approach to portfolio construction, which, in some cases, index-based tools can not only help you build, but, they may not be very passive, in the sense that, you may be then quite active in your allocations. And, this focus on liquidity and transparency, that things like ETFs can help achieve, or may help achieve, changes the game and changes the way that people can approach the challenge of generating outcomes for their clients, that some people think will give them a better chance of success.
I think those are some of the mega trends that I'm seeing relevant here. And, it's really exciting for me to come to the region and to meet with people and find out what else I didn't know about the South African markets.
Mosidi Modise:
Well, excellent. You've certainly unpacked a lot for us. I'm very excited for our viewers who can get first access to this very useful tool that I think will be very valuable now and in the future for them. So, thank you very much for joining us, Tim.
Tim Edwards:
My great pleasure. Thank you.
