S&P Dow Jones Indices has been the de facto scorekeeper of the ongoing active versus passive debate since the first publication of the S&P Indices Versus Active (SPIVA) U.S. Scorecard in 2002. The SPIVA South Africa Scorecard measures the performance of actively managed South African equity and fixed income funds denominated in South African rands (ZAR) against their respective benchmark indices over one-, three-, and five-year investment horizons.
YEAR-END 2020 HIGHLIGHTS
South African Equity
Over 78% of South African Equity funds underperformed the S&P South Africa 50 over the one-year period. Comparing the same funds with a broader benchmark, namely the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index, 44% of funds underperformed. Over the five-year time horizon, the percentage of funds that underperformed the S&P South Africa 50 and the S&P South Africa DSW Capped Index increased to 95% and 60%, respectively.
The struggle for South African Equity funds to keep pace with the S&P South Africa 50 is further highlighted by the fact that even funds in the 75th percentile performed 0.9% below the benchmark for the one-year period. Furthermore, on an asset-weighted basis, South African Equity funds trailed the same benchmark by 3% annualized over five years. Even on a risk-adjusted basis, the same funds had a lower return-to-volatility ratio over the three- and five-year periods.
South African Equity funds had a poor start to 2020, falling 10% by the end of February. Things did not improve with the onset of COVID-19, as March 2020 saw the single biggest monthly loss in the past five years, with the asset-weighted South African Equity fund category and the S&P South Africa DSW Capped Index dropping 16.5% and 16.1%, respectively. This was followed by an immediate rebound in April 2020, when they posted their single biggest monthly gains in the past five years of 14.5% and 15.0%, respectively. Over the course of 2020, South African Equity funds and benchmarks continued to recover slowly and, aided by news of a vaccine in November, these funds were able to post positive returns for the year on an asset-weighted basis.
Global Equity funds were likely aided by a significant depreciation in the South African rand during the first four months of 2020, as they were able to avoid large drawdowns seen elsewhere and ultimately posted much stronger results than their domestic-focused counterparts, finishing the year up 19.7% on an asset-weighted basis. Despite this strong performance, they still trailed the S&P Global 1200 benchmark by 1.7%, and 66% of funds were unable to beat the benchmark over the one-year period. Over the five-year time horizon, the outlook was no better, as on an asset-weighted basis, the funds trailed the benchmark by 2.16%, annually, and 93% of funds were unable to beat the benchmark.
Over the one-year period, 84% of Diversified/Aggregate Bond funds failed to beat the S&P South Africa Sovereign Bond 1+ Year Index. Short-Term Bond funds fared better, with only 17% failing to beat the benchmark. However, when measuring outperformance on a risk-adjusted basis, we saw that more than 92% of Short-Term Bond funds failed to beat the benchmark over the one-year period. The return-to-volatility ratio for the benchmark was also far greater than that of asset-weighted Short-Term Bond funds, indicating that for each unit of risk, the benchmark was able to generate greater returns.
In the battle of allocation between fixed income and equity, we saw that fixed income funds were able to deliver higher annualized asset-weighted returns over the medium- and long-term periods than South African Equity funds. Importantly, over the same periods the return-to-volatility ratio for fixed income funds was many multiples higher, indicating that, despite posting a higher return, fixed income funds were far less risky than South African Equity funds.