Research debunks index argument

Research by Partnership Planning debunks the notion put out by index managers that actively managed funds do not consistently outperform the index, even after the higher fees are subtracted from the returns.

Partnership Planning head of research, Lynne Curtis, says the research found that the median Australian equities fund manager has consistently outperformed the All Ordianries index.

"The index approach says active managers can't consistently outperform the index. We would argue that there are sufficient numbers of actively managed funds that do it," Curtis says.

Curtis also says the large capitalisation stock bias of Australian index funds exposes them to higher risk. She says while these biases are evident in active funds, the difference is that in the active funds, the biases are intended and are aimed at adding value.

Curtis argues that index investing indicates a belief that the market is efficient and that it is therefore impossible to add value by identifying mispriced securities and tilting away from the index.

"Index managers argue that even if markets are not fully efficient, it can be difficult to identify active managers who can add value," she says.

She adds that index funds also point to the higher fees charged by active funds as a point in favour of the passive styled investing.

But statistics released by Partnership Planning on performance by the median fund managers and upper quartile fund managers tell a different story, even after the higher fees are factored out of the return equation.

Median returns have equalled or outperformed the index over the past 10 years, while managers in the upper quartile have outperformed the All Ordinaries index by more than five per cent.

Curtis believes Partnership Planning has refuted the argument by index funds that it is difficult to choose managers who consistently add value in its selection of a blend of three managers which since July 1996 has outperformed the All Ords by up to 10 per cent.