Active management delivered above-benchmark gains for NZ equity and bond investors on a money-weighted scale over the last 15 years despite the majority of funds in each sector underperforming S&P indices.
The first full-fledged S&P Indices Versus Active (SPIVA) Scorecard for the NZ market published last week shows more than 80 per cent of local bond and share funds ended below-benchmark after fees during the 15 years to December 31, 2024.
But the odds of active outperformance improved over shorter time periods and when adjusting for risk for both NZ fixed income and equity funds.
Furthermore, the average NZ bond and equity fund outperformed respective S&P indices after fees over all periods reported up to 15 years on an asset-weighted basis, according to the SPIVA data.
The average NZ bond fund returned just over 4 per cent post-fees on the asset-weighted scale (which represents actual investor experience) for the 15-year stretch compared to 3.87 per cent for the S&P index; average local equity fund performance squeaked past the benchmark by just 0.02 per cent – 10.99 per cent versus the index 10.97 per cent – by the same gauge.
Like most global bourses, the NZ stock exchange has become increasingly top-heavy over the last few years – albeit remaining less concentrated than developed market peers – in a trend that saw 61 per cent of the S&P/NZX50 companies underperform the index last year.
“The skew in stock returns translated into skewed manager returns, with the average fund return—13.4% and 14.0% on an equal- and asset-weighted basis, respectively—being notably higher than the median return of 11.6%,” the SPIVA report says.
While the proportion of sub-index NZ bond funds rises over time, the cohort has performed well over the previous one- to five-year periods with only 20 per cent missing the S&P benchmark in 2024.
The NZ fixed income market saw a pick-up in yields and falling duration risk last year, the study says.
“Active fund managers seemed well positioned to capitalize on these trends, with the average duration of the New Zealand Bond funds remaining lower than that of the benchmark in 2024,” the SPIVA report says. “Many managers overweighted corporate bonds, which typically have a lower duration than government bonds, or favored shorter-dated government bonds.”
If the SPIVA data provides some solace for local active equity and bond managers, the report is less encouraging for NZ-domiciled global share funds.
“Funds in the Global Equity and Global Equity (Hedged) categories struggled to keep up, with one-year underperformance rates of 83% and 71%, respectively. Longer term, underperformance rates were even more pronounced, with 100% of funds underperforming the benchmark over 15 years.”
Sue Lee, S&P Dow Jones Indices (S&PDJI) APAC index investment strategy head, said the number of global equity funds available to NZ investors has increased in recent years.
In total, the SPIVA NZ study measured the performance of 111 active funds last year using Morningstar data including 67 global share products (31 hedged and 36 unhedged): 15 years ago the sample covered 32 international share funds, of which 11 were hedged.
Lee said while the small NZ market remains statistically borderline, the now standalone status of the country report provides valuable insight into the passive-active debate for local investors.
“Passive penetration is relatively low in the NZ market,” she said, with perhaps less than 20 per cent of retail managed funds indexed.
In a presentation to the Kernel Wealth adviser conference in Christchurch last week, Lee said index products represent half of the US managed funds market: in 2023 passive US equity funds saw about US$2.5 trillion of net flows compared to US$2.6 trillion net outflows from actively managed counterparts.
She said the now 20 year-old US SPIVA study – that consistently finds active large-cap share managers, in particular, struggle to outperform – has played an influential role in driving the shift to passive funds. Including NZ, S&PDJI now publishes 10 SPIVA country reports as well as global studies.
The SPIVA process measures all eligible funds over each time period, including defunct products, to correct for ‘survivorship bias’ while gauging performance against an “appropriate” S&P index rather than benchmarks often preferred by marketers “regardless of size or style classification”.