By Anu Ganti
Since 2013, our SPIVA® Australia Scorecards have shown that the majority of actively managed Australian equity funds have typically underperformed the S&P/ASX 200. According to the recently published SPIVA Australia Mid-Year 2023 Scorecard, 55% of Australian Equity General fund managers lagged the S&P/ASX 200 in the first half of 2023.
Results for some fund categories were bleaker, with 74% of International Equity General fund managers underperforming the S&P Developed Ex-Australia LargeMidCap in the first half of 2023. We can use style bias, which plays a major role in explaining active manager outperformance, to disentangle this mixed set of results. For example, in our SPIVA report, we found that domestic equity managers may have benefited from exposure to overseas markets, which have outperformed Australian large caps so far this year.
However, style bias can be a double-edged sword, as Australian international equity managers might have faced headwinds from the outperformance of the U.S. relative to other international markets. In Australian dollar terms, the S&P 500® outperformed the S&P Developed Ex-U.S. LargeMidCap1 by 5% over the six-month period ending in June. This is a moderate degree of relative strength by historical standards, as we observe in Exhibit 1: 2013, 2014, 2016 and 2021 were years of significant U.S. outperformance in which, perhaps not coincidentally, we also reported the highest international active fund underperformance rates of any SPIVA report, suggesting a possible aggregate underweight to U.S. equities relative to the benchmark.2
Meanwhile, Australian Bonds funds performed relatively better than their large-cap equity counterparts, with a majority outperformance of 55%. Again, perhaps venturing outside of Australia to gain credit exposures played a favorable role. Exhibit 2 illustrates that active Australian Bonds funds have tended to outperform when globally domiciled or issued Australian dollar-denominated corporate bonds of similar credit quality have performed well relative to their locally issued peers. As of mid-year 2023, the S&P Australia Investment Grade Corporate Bond Index outperformed the benchmark S&P/ASX Australian Fixed Interest 0+ Index by 1%.
Style biases come in many forms and can help explain the likelihood of active outperformance across both equities and fixed income markets. Understanding these biases and distinguishing them from true security selection skill may provide valuable insights for Australian asset owners when making manager selection decisions.
The author would like to thank Grace Stoddart for her contributions to this post.
1 S&P Developed Ex-U.S. LargeMidCap had a 6% weight in Australia as of August 31, 2023.
2 S&P Developed Ex-Australia LargeMidCap had a 68% weight in the U.S. as of August 31, 2023.
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