I hate to sound like a broken record but some more data has been recently published by Standard & Poor which provides evidence that an index based approach to investing will serve you well.
S & P have started to publish a bi-annual report looking at the investment performance of active managers as opposed to the benchmark S&P ASX200 and MSCI World ex Australia indices - Standard & Poor's Index Versus Active Funds Scorecard - Australia Year End 2009. Their second report has been published this week and provides the following conclusions:
Over a five-year period ending December 2009, respective benchmark indices have outperformed the majority of active funds across the different peer groups covered by the SPIVA Scorecard. In contrast for the 2009 calendar year comparative analysis of the annual returns shows that a majority of active funds have outperformed their benchmark across most peer groups.
There is some cause to cheer for active managers as the results suggest that 2009 was a much better year on average compared to the index. However the 5 year results still show that more than 63% of active funds under-performed over that period. That suggests that the performance from 2005 to 2008 must have been particularly poor.
There has also been some cause to cheer for small company funds showing a strong record over 5 years.
Five years is still not a very long window but you would expect that over even longer periods active managers perform even worse. The latest report is even further evidence that an active approach to investing increases the probability that you will perform worse than the average investor return - i.e. the index.
A Clear Direction's approach is to use index funds as they base and add to that small and value exposures. Over the 5 years these exposures have provided after fee premiums of:
Australian small company exposure 1.44%
Australian value exposure 0.87%
Over 7 years these premiums are even greater.
The results suggest the approach we are employing is positioning client portfolios well above the returns being provided by active managers.