Morningstar claims fund managers lack skill
Managed funds research houseMorningstaris claiming managed funds are able to beat any given benchmark but few do so, due to a lack of manager skill.
Morningstar conducted the study after being commissioned byVanguard Investmentsand used its own data to identify managers which beat the index and demonstrate some skill to do so.
However Morningstar states that skill is a subjective term and can be measured using qualitative and quantitative measures and its study applied a statistical test to measure how often funds added value above an index for five and seven year periods to the end of June 2003.
In releasing the study findings today Morningstar says it calculated manager skill by the level of excess returns over a particular benchmark and the consistency at which this took place.
The study says retail Australian equities funds were the most dominant example of its core premise that many funds can beat a benchmark but few to do with skill, with 61 per cent of funds beating the benchmark, but only 4 per cent demonstrating skill in doing so.
Morningstar head of consulting Anthony Serhan says a measure of skill is the level of outperformance a fund achieves above benchmark stating that 52 per cent of wholesale listed property funds have beaten the index.
However Serhan says the outperformance was very low and was not possible to state it showed any skill or would be repeatable by the fund manager with only two of the listed property funds in the study generating excesses above 1 per cent per annum.
The study also found that excess returns increased as the level of risk increased in an asset class with Australian equities funds beating the index most often followed by international equities, and then Australian fixed interest.
As a result Morningstar says the benefits of selecting the best performing managers varies between asset classes but is reduced in the Australian fixed interest sector compared with Australian equities.
“The study shows clearly that it’s more difficult to add value in some asset classes than others. This highlights the dangers in drawing conclusions from simple return figures. A return figure tells you where the fund finished — it doesn't tell you how the race was run,” Serhan says.
The study results are based on an examination of 316 retail and wholesale funds in Australian equities, international equities, Australian listed property, and Australian fixed interest which had a minimum five year performance track record.
The fund returns were net of ongoing expenses and were compared with an unadjusted capital market index return for each sector, while information ratios were based on the fund’s excess returns divided by the tracking error over the relevant period.
Morningstar considered ‘skill’ for returns to be a managed fund which had a positive information ratio and a monthly excess return (over the five or seven years to 30 June 2003) greater than zero at the 95 per cent confidence level.
AUTHOR
Jason Spits
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