Sixty per cent of large cap managers failed to beat the index over the past year, according to the 2016 mid-year review by Dow Jones of active versus passive investing, while over a five-year period almost 70 per cent of managers couldn't match what the major index returned.

The results are better if investors had given their money to a small or mid-cap manager.

Time pays

Although just over 61 per cent of managers in this space failed to beat their benchmark index over a one-year period there was some good news if investors allowed them more time to generate returns.

Over a five-year time frame around 62 per cent of fund managers in the small and mid cap managed to do better than the index.

Over a five-year period almost 70 per cent of managers couldn't match what the major index returned.

Small and mid-cap stocks have been fertile ground for investors looking for any growth over the past few years with the poor performance of the four major banks, and miners like BHP Billiton and Rio Tinto, dragging down the large cap index.

The worst performance, however, came from managers of global shares, bonds and property trusts with more than eight out of 10 funds across all three asset classes failing to do better than their relevant benchmark index.


The report takes a look at how almost 1000 actively managed equity and bond funds do when compared to their benchmarks, or the index, over a one-year, three-year and five-year time frame.

As per usual eyes will bulge, blood pressure will rise and hearts will race when share fund investors take a look at the latest returns produced by their managers.

It all comes as investors keep getting told to expect lower returns in the future from all asset classes which makes picking the right stock, fund manager, bond or property more important than ever.

For example the major S & P/ASX 200 index was up just 0.56 per cent in the 12-month period ending June 2016 according to the report, while, on average, all managers generated a return of 0.09 per cent.

Reflecting the drop in bond yields over the past year, the return from the benchmark S&P/ASX Australian Fixed Interest Index was a healthy 7 per cent, but Australian bond fund managers returned on average a gain of just 5.6 per cent.

What investors really want is a fund manager with the ideas and the skill to gain more than the market on a regular basis. That might mean going short a stock rather than just identifying winners.

Hearts & Minds

It's why Mr Grounds is plugging next month's Hearts & Minds Investors Leaders Conference, where top global and local fund managers who do beat the index - including Peter Cooper, Rob Luciano and Geoff Wilson - will share all their best investment ideas.


Even when you think a stock is a buy it doesn't always work out.

In October, 2012 UBS launched an exchange-traded fund based on its own research buy recommendations.

Since then the major S & P ASX 200 index is up 43 per cent including dividends while the UBS ETF has delivered a total return of 30 per cent.

In February 2016, the ETF was benchmarked to the Morningstar Australia Moat Focus IndexTM .

Since then it is up 8.5 per cent including dividends compared to a 12.3 per cent total return from the major index.

None of this helps the investor who right now pays the majority of share managers a lucrative fee with the hope they can beat the index.

If you'd invested in an index fund, you could have got a similar return for a much lower annual fee.

There's no doubt the local sharemarket includes some very good and well known fund managers, as well as not so well-known but who produce consistent returns.


These days they use different strategies and shorting stocks has become a lucrative strategy but whether they are buying or selling, managers still have to get it right more often than they get it wrong.

Sometimes they might struggle over short periods, such as one year, but their track records suggest the barren periods are blips that will right themselves over time.

It's finding those managers and working out if their time frame suits yours and the fees they charge are appropriate to their money-making ability.