Beating the market is much harder than you think

By Vanguard

Investing strategy

“Don’t look for the needle in the haystack. Just buy the haystack”

That’s a famous quote by Vanguard’s founder, John Bogle, that really sums up why it’s so hard for any investor, even the professional active stock pickers, to beat the returns from a share market.

The portfolio managers of actively managed funds typically hand-pick stocks to put into their funds in the belief they will deliver higher returns than the share market. By contrast, index fund managers such as Vanguard invest in all of the companies within a specific share market index so investors can capture the market’s total return.

Finding companies that will deliver better returns than the broader share market is fairly similar to hunting for needles in a haystack. Don’t expect to find them.

That’s borne out in new data just released by S&P Dow Jones Indices that’s contained in its SPIVA Australia Year-End 2024 Scorecard. SPIVA stands for S&P Indices versus Active and it measures the performance of actively managed funds relative to their assigned index benchmarks over various time horizons.

The latest SPIVA report is a 12-month snapshot of active managers’ performance, although the report also looks at their performance over 1, 3, 5, 10, and 15 years.

 

Most active funds have underperformed

Over the year to 31 December, 2024, a majority of actively managed funds across all Australian fund categories underperformed their assigned benchmarks.

Of the Australian active managers with “Global Equity General” portfolios, 85.4% failed to match the S&P World Index’s total return of 31.6% in Australian dollar terms, posting an average asset-weighted return of 24.8% over 2024. Over the last five years that underperformance number is about 90.7%, according to S&P’s data.

It was a similar story for Australian active managers with “Australian Equity General” portfolios. About 56% of active investment managers failed to beat the 11.4% return from the S&P/ASX 200 Index over 2024.

With the S&P/ASX 200 A-REIT Index posting a robust 18.5% return, the Australian Equity A-REIT funds recorded the highest underperformance rate among all reported categories at 86.2%.

 

The SPIVA scorecards are a powerful reminder that simple is good. Great investing does not have to be complex or expensive.

— Duncan Burns,

Vanguard’s Chief Investment Officer Asia-Pacific

 

Active managers in the Australian Bonds category continued to excel, recording a 29.8% underperformance rate in 2024, following a 26% rate in 2023. However, the underperformance numbers rise higher over longer periods, with 81.6% of active bond fund managers having lagged over the last 15-year period.

This isn’t just an Australian phenomenon either. The SPIVA U.S. 2024 Scorecard, released in March, shows 65% of all active large-cap U.S. equity funds underperformed the S&P 500 Index last year, worse than the 60% rate observed in 2023 and slightly above the 64% average annual rate reported over the 24-year history of our SPIVA Scorecards.

In Europe, 91% of active fund managers within the euro-denominated Global Equity category underperformed the S&P World Index, the highest number in the history of S&P’s SPIVA Europe Scorecards.

Active underperformance is driving investors to index funds

The latest Australian SPIVA results highlight the benefits of using index funds as the core of an investment portfolio.

Index funds are known for their low expense ratios, which can significantly reduce the overall cost of investing. On the other hand, higher management costs are one of the key reasons why many active fund managers underperform the market.

“The SPIVA scorecards are a powerful reminder that simple is good,” says Duncan Burns, Vanguard’s Chief Investment Officer, Asia Pacific. “Great investing does not have to be complex or expensive.”

“It’s common for investors to think they need to try to do better than the market by diversifying into riskier active investments, but the reality is that most active investments fail to beat the returns achieved by index-tracking exchange traded funds (ETFs) and unlisted managed index funds.

“There’s huge scope for Australian index funds, and frankly there are a lot of Australian investors who could improve their retirement and investment outcomes by dialling up their index exposure through index ETFs.”