Have India's active managers lost their mojo?

By ROBIN POWELL

Our friends at S&P Dow Jones Indices have published a number of mid-year SPIVA scorecards in recent weeks. Most of them contain few surprises. The story in developed markets like the

United States

and

Europe

 is well-rehearsed: only a small proportion of active fund managers outperform the relevant index over meaningful timeframes. 

More interesting for me are the scorecards for parts of the world that have only been included in the SPIVA analysis in the last few years — the Middle East, North Africa and Latin America, for example. There is a common perception that investors are better off using actively managed funds in developing markets such as these. Because they are less researched, the theory goes, such markets provide active managers with more opportunities to generate alpha. However, as S&P's Sherifa Issifu explained in our

recent video

on emerging markets, the SPIVA data tell a very different story. Active stockpickers are struggling to outperform the market everywhere. In some developing markets, active fund performance is even worse than it is in the US, the most heavily researched market of all. In

Chile

, for example, fewer than one in 20 active managers have beaten the S&P Chile BMI in the five year period to the end of December 2020.

It's particularly worth noting the changing picture in India. It's been suggested in the past that India was a special case — a market where active managers

could

deliver value, relative to indexing, net of costs. But the

mid-year 2021 scorecard

for India suggests that the situation there is now similar to that in most other countries. For example, in the five-year period ending 30th June 2021, only around 17% of Indian large-cap funds beat the S&P BSE 100, and only about 2% of composite bond funds outperformed the S&P BSE India Bond Index. What's noticeable too is that active fund performance has worsened over the last three years.

So, what's happening? How can this trend be explained? And is it a blip or a secular shift? As my latest article for Betafolio points out, India's active managers are succumbing to exactly the same issues encountered by their peers elsewhere.

◊

You’ll usually find an exception to the rule — pretty much any rule, in fact — if you’re determined to find one. The rule that investors are better off investing in passive, rather than active, funds isn’t any different. There will always be outliers — spectacular losers as well as winners — especially in the short term. That’s just the law of averages.

So, writing and sharing articles as I do about evidence-based investing, I’ve become used to responses beginning, “But what about..?” “Ah, but what about Neil Woodford?” was once especially common (enough said about that). Another popular retort used to be “What about India?” OK, very few active managers can outperform a well-researched market like the US or the UK, the argument went, but a skilful manager can add value in a market like India.

It was, for many years, a valid argument. As recently as 2017, respectable analysts such as Morningstar pointed to evidence of persistent outperformance by Indian equity funds.

But active fund performance has tailed off markedly in recent years, and 2020, which provided stockpickers with a golden opportunity to prove their worth, was an especially disappointing year.

READ THE FULL ARTICLE HERE

For more information and analysis on this subject, read this report by Crisil, another S&P Global company, published at the end of June this year:

Shrinking alpha in India