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Why more investors are choosing index funds

The latest SPIVA Australia Scorecard is out, and the results are telling for investors.

The Australian share market surged towards the end of last year, recording a total annual gain of more than 12%.

That was good news for people who invest in index-tracking funds, including exchange traded funds (ETFs), that have been designed to capture the broad return from the local share market by having holdings in hundreds of Australia’s largest companies.

But the story was different for many investors in Australian equity general funds, where portfolio managers hand-pick specific companies in an attempt to outperform the broader market.

New data released by S&P Dow Jones Indices shows 76.5% of these actively managed funds struggled to keep up with the market’s performance over 2023 – the second-highest underperformance rate on record.

The data was contained in the latest SPIVA Australia Scorecard, which measures the performance of actively managed funds relative to index benchmarks over various time horizons.

Longer term, underperformance rates have been even higher. A majority of actively managed Australian equity general funds have underperformed the broader share market over the last three, five, 10 and 15 years. In fact, the market underperformance rate rises to 85.3% over the last 15 years.

As the chart below shows, it’s a similar story for other types of actively managed funds.

Among international equity general funds, 81.4% trailed the 24.1% total return from the S&P Developed Ex-Australia LargeMidCap Index last year. The underperformance rate of actively managed international equity funds rises to 94% over 15 years.

A compelling argument for index funds

Duncan Burns, Vanguard’s Chief Investment Officer, Asia Pacific, says the latest SPIVA results highlight the benefits of using index funds as the core of an investment portfolio.

“This year’s results could be summed up simply as, most active managers underperform their passive benchmarks most of the time. This is particularly underscored by the one-year underperformance for active Australian equity and international equity funds rates being their second highest in recent years.

“Findings like these are not isolated to the Australian financial markets; the reporting shows similar long-term results in global share and bond markets.

“This is not to say active fund managers can never outperform the broader market. A number of exceptional active managers do.

“Active bond managers did well particularly in the last 12 months, although the majority underperformed when looking at the last three-year period. But the report serves as a good reminder that beating the market is really much harder than most people think.”

For more information or to read the full article by Tony Kaye, Senior Personal Finance Writer visit: Why more investors are choosing index funds


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