Last Monday, I wrote about new research from S&P Dow Jones that cast doubt about the ability of active fund managers to add real value. While it largely gave the tick to active equity funds, particularly small and mid-cap funds, in the case of fixed interest funds, it was not very flattering.
To recap, S&P Dow Jones compared the performances of 66 Australian bond funds over 1 year, 3 years and 5 years to 30 June 2016 with the performance of the S&P/ASX Fixed Interest Index. It found that 89% of active funds underperformed (after fees) the index over 1 year, 92% underperformed over 3 years and 89% had underperformed over 5 years. While bigger fixed interest funds tended to do better than smaller funds, at the median (50th percentile) of funds, the underperformance was quite material at 1.09% over 1 year, 1.02% pa over 3 years and 0.99% pa over 5 years.
On this basis, I have concluded that the “best” fixed interest funds are index hugging, low cost exchange traded funds (ETF). That doesn’t mean that there aren’t any really good active fixed interest fund managers, rather it means that on the basis of probability, picking an ETF will be a safer play. Also, unlike equity managers who can parade their distinctive investment approach, bond managers are dealing in a more homogeneous asset. It is thus a lot harder to differentiate Fixed Interest Manager A vs. Fixed Interest Manager B on the basis of investment approach or style.