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S&P warns of active fund performance in Australia

S&P warns of active fund performance in Australia

A majority of actively managed Australian mutual funds in most categories have underperformed their benchmarks, with the exception of Australian mid-and small-cap strategies, a new report by S&P Dow Jones Indices has revealed.

The study found that Australian mid-and small-cap funds gained an average return of 20.8% over 12 months ending 30 June. The performance was better than the benchmark S&P/ASX Mid-Small index, which recorded a 12-month return of 18.8%.

However, 44.9% of the funds underperformed the benchmark in the past year, with the number growing to 70% over three- and five-year periods.

S&P has painted a dismal picture of active funds investing in the $1.8 trillion economy that has gone 26 years recession-free, especially when returns are calculated net of fees.

In the past year, Australian large-cap equity funds recorded 12.3% in returns, with 57.6% of funds underperforming the 13% performance of the S&P/ASX 200.

In the bonds space, Australian funds gained 2.4% in the past year on average, with 69.1% lagging the S&P/ASX Australian Fixed Interest 0+ Index, which returned 3.07%.

‘Their risk-adjusted performance appeared more favourable, with 52.7%, 66.0%, and 69.0% of funds lagging the benchmark over the 1-, 5-, and 10-year periods, respectively, on a risk-adjusted basis,’ the author Priscilla Luk wrote.

A surprising 91.3% of Australian A-Reit funds have underperformed the S&P/ASX 200 A-REIT index in the past year. These funds returned an average of 11.2% versus the benchmark’s 13%.

According to S&P, this is a multi-year trend. After evaluating the returns of over 849 Australian equity funds and 116 Australian bond funds, the report found that more than 70% of the large-cap equity, bond and A-Reit funds underperformed benchmarks on an absolute basis over the past 10 years.

What’s more, almost 90% of the 425 international equity funds in question have also failed to meet benchmark returns since 2008.

Fund survivorship

While outperforming other categories in the past year, Australian mid- and small-cap funds have also disappeared at the fastest rate comparatively.

There were 120 funds at the end of June last year, but only 92.5% have survived so far.

In the past year, about 3% of all Australian funds from all measured categories were merged or liquidated, with only Australian bond and A-Reit funds recording a 100% survival rate.

Less than 60% and 50% of funds across all categories survived for the 10- and 15-year periods, respectively, with Australian bond and international equity funds having the lowest survival rates.

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