Performance persistence of South African unit trust funds

Abstract

The optimality of active or passively managed investment fund alternatives is a contentious topic in the field of investment management. The efficient market hypothesis states that active funds should not be able to derive net-of-fee risk-adjusted returns in excess of their benchmarks on a persistent basis. However, emerging market economies such as South Africa that have less efficient markets, present active managers with greater opportunities to persistently outperform after fees have been accounted for. This study evaluates the performance persistency of actively managed South African equity, interest-bearing, multi asset, and real estate unit trust funds relative to investable passive alternatives. The rolling holding period performance of actively managed unit trusts relative to investable passive alternatives are assessed by making use of notched boxplots. Active funds are classified as persistent out- or underperformers if the median of their rolling period excess return distributions relative to their respective passive alternatives is significantly different from zero at a 5% level of significance. This study finds that a greater proportion (83.969%) of active funds persistently out- or underperform their comparable passive alternatives. More evidence of persistently outperforming funds is found amongst interest-bearing and real estate funds. Conversely, a greater number of persistently underperforming funds are found amongst equity and multi asset funds. Furthermore, this study concludes that other determinants of unit trust fund performance persistence such as the degree of competition, sector- and fund-level diseconomies of scale, and investment charges should supplement the analysis of a fund’s performance history when making future investment decisions.