Dispelling the myth – active managers can add value

The active versus passive management debate has again come into focus following the recent release of various research reports on the topic. The results both across and within asset classes were mixed, suggesting that the ‘active/passive debate’ ultimately comes down to manager selection and personal preference, according to BRETT HIMBURY, the managing director of Tyndall Investment Management. While it is inevitable that some active managers will underperform their respective indices at points in time, a significant proportion also outperform. A point that seems to be overlooked is that, while comparing a fund to the index is the most common measurement to use in the active/passive debate (as I have done in this article, to be consistent with recent publicly available research), in reality this is not comparing like with like, nor is it the real ‘investor experience’. An index is a theoretical measure, which an investor can’t actually invest in and isn’t representative of a typical managed fund.

For instance, an index return doesn’t have fees, incur transaction costs or experience cashflows, and it rebalances at closing prices. All of these factors impact returns in the real world. So comparing an active fund’s returns with the index is essentially comparing a real investment opportunity with a theoretical one. A more accurate measure is to compare the returns of active funds with those of passive funds. As a guide to the difference this can make, one of the most popular flagship passive funds in the Australian equities market returned 0.18 per cent per annum below its benchmark on an after-fee basis since its inception (12 years to 30 June 2009). Compare this with the Tyndall Australian Share Wholesale Portfolio. As at 30 June 2009, the Fund outperformed its benchmark, the S&P/ASX 200 Accumulation Index (after fees), over one, three, five, seven, 10 years and since its inception (March 1995), as shown in chart 1.

In dollar terms, a $10,000 investment in the Fund in March 1995 would have been worth $43,195 (after fees) in June 2009, compared with a theoretical $36,000 if invested in the Index. This difference of $7195 over a 14-year period is a significant amount for an investor, and one example of the benefits an active fund manager can provide over an index manager. Indi vidua l st ocks At Tyndall, we have undertaken our own research into the performance of individual stocks in the S&P/ASX 200 Index from 2001 to 2008, which has provided some interesting insights on the active/passive debate. Over the eight-year period that we studied, there were five years where more than 30 percent of stocks delivered negative returns (as shown in chart 2) – even in the good years for the market. In 2007, for example, when the market returned a healthy 16 percent per annum, 40 percent of stocks in the Index showed a negative return. There were also some wide variations in performance. The worst performing stock (Centro Properties) fell close to 90 percent that year. In comparison, the best performing stock (Incitec Pivot) rose a phenomenal 245 percent.