Ralph K. Czichon trading as Wise Directions
Chartered Financial Practitioner®
Authorised Representatives of
AMP Financial Planning Pty Limited
AFS License Number 232706/ABN 20 282 609 719
Compelling Arguments or False Assumption No 2
For many years various studies & research papers have shown that a very high percentage of
active fund managers fail to meet their respective benchmarks over 1, 3, 5, and 10 years.
Example:
In July 2015 Vanguard Research article “The case for index funds investing in Australia”
found that 62% of all large Cap Equity Funds underperformed their benchmarks over a ten
year period.
In April 2016 SPIVA’s Year-End 2015 Scored card revealed that 72.30% of the international
equity funds underperformed for one year and 86.7% and 88.2% for the three and five year
period.
Conclusion
The above observations are often used to strongly consider passive investment funds due to
their low cost opposed to active funds as they tend to be much more expensive. Therefore
why pay more when one does not get compensated or rewarded in terms of returns over and
above certain benchmarks.
Questions:
At first glance this makes a compelling argument using passive funds seeing that active fund
managers appear to do so poorly in comparison over various time frames.
Does that mean one should automatically ignore active fund managers or should the question
be asked is it actually possible to have all active fund managers outperform their respective
index at all times?

Consider:
Irrespective of the actual number of underperforming active fund managers at any given
time one needs to keep in mind that by default many won’t beat their respective benchmark
at many points in time.
The reason is simply because all funds have different time frame objectives, which may
range from 3 to 7 years.
Even when comparing 5 different funds with the same time frame objective to beat the
same benchmark of a 5 year period it does not mean they all started at the same time.
For example if we compare at 2016 and look back the last 5 years naturally for some funds
by default 2016 would either be 1, 2, 3, 4 years into beating a benchmark with a 5 year time
frame objective.
Lesson learned:
Looking at statistics in isolation and ignoring the effects of probability may cloud the
judgement of what is meaningful and appropriate.
The mere fact that it is probably impossible to have a very high percentage of outperforming
funds at any given time frame should not be taken as an argument that none of them do and
it is always worth exploring and considering the alternatives.
It’s worth noting that according to the SPIVA Year end 2015 Report 72.7% of Australian
mid and small cap equity funds have outperformed their benchmark by 7.70% over one year
and 70.1% and 71.1% over three and five years.
Ralph Czichon ABN 20 282 609 719 trading as Wise Directions, is an authorised representative and credit representative of AMP Financial
Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.
This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any
particular person. You need to consider your financial situation and needs before making any decisions based on this information.
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The Example is illustrative only and is not an estimate of the investment returns you will receive or fees and costs you will incur.
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