Consider the problem of Active vs Passive Investing in the Malaysian context.
There is an assumed knowledge that most Active managers will fail to beat the index (after fees).
Hence one should just do Passive Investing, or, ‘buy the Index’.
However there is also another assumption that Emerging Markets, like Malaysia, is not efficient.
Hence Active Investing can beat the Index, or, Malaysian Unit Trust Funds are worth buying.
It is easy to find supporters of both assumptions, so which is correct?
This is a fascinating question as I heard a famous fund manager recently gave a very candid assessment: that most Funds do not beat the index. Put another way, most funds on the market are quite useless and we should just buy index funds and sleep on it.
Because we take money seriously, we will find out the answer, and we will do this the data analysis way.
As opposed to Active Investing where fund managers actively search for hidden gems undiscovered by the market, Passive Investing is simply investing in a basket of funds tracking the index, usually, ETFs (Exchange Traded Funds).
There are some ‘tracking errors’ or deviations between the ETF and the index, so let’s establish our baseline first:
We are using the FTSE Bursa Malaysia index tracking comparing against the corresponding ETF offered by AMinvest. We also throw in a competiting index from MSCI for reference as well.
From the ETF’s own quarterly report:
From both the graph as well as the ETF’s own report, we can see that there are about 1% tracking loss per annum. Perhaps we can think of these losses as 1% fees per annum.
So far so good, and we’ve established a baseline.
Now we plot it against all the Malaysian equity funds. There are probably a lot of funds managers getting a cold shiver right now as we lay bare their performance for all to see:
For our purposes, we shall use only the 1,3,5,10 years data for long term comparison.
Funds consistently outperforming the ETF are placed above it, and the rest placed below it.
(Funds with less than 5 years track record are left out for this comparison, Funds shown below is not a recommendation to buy them)
Here is where it gets interesting.
Let’s say there’s average fee of 1% charged for the investment. So how many funds still perform net of the 1% fee?
Finaly tally: 42 out of 137 funds or approximately 30% funds consistently beat the index.
So what sort of conclusion can we get from this exercise?
1. If we are lazy, can’t go wrong with buying an ETF as it is better than 70% of funds out there.
2. If we are prepared to do some homework or engage a licensed, practising, systematic investment advisor to help us, we should be able to do better than the index.
For advance practitioners, can you identify the average ‘alpha’ delivered by the performing funds? And how would the performance gap look like compounded? Are you able to decide how much is the ‘alpha’ worth?
Answer: 3~4% alpha. In this case we use the median value to eliminate outliers. It may look ‘little’, but for a reminder of how big a difference a small compounding interest make, please refer here again: https://aikyong.wordpress.com/2016/07/07/first-blog-post/
Some reading about ETFs: http://www.bursamalaysia.com/market/securities/equities/products/exchange-traded-funds-etfs/
disclaimer: funds selected are categorised under Malaysian Equity in FE Analytics. yes i know there are some regional funds mixed up inside, but the broad outline still holds.