Inspired by BMO GAM’s recent comparison of long-term returns of active funds with those of passive funds, FSA decided to have a similar look at China equity funds available for sale in Hong Kong and Singapore.
FSA used one-, three-, and ten-year performance data from FE to determine how the performance of active fund managers compares to that of exchange-traded funds (ETFs).
China, however, has some unique characteristics that should be noted. China equity funds are new compared to developed market equity funds. FE data shows only seven China equity ETFs and 28 mutual funds with a ten-year track record. In terms of a one-year track record, there are only 37 ETFs and 83 actively-managed funds.
Moreover, during the last ten years, China has significantly liberalised its economy and stock markets, which would impact on index performance. It has also gradually opened its market to foreign investors, making it easier for active fund managers to access Chinese securities. But the lack of transparency in many listed firms make them difficult to assess.
In the context of these specific limitations, the results show that over 10 years, active fund managers have, on average, outperformed the average ETF.
While the cumulative ten-year returns of actively-managed funds span a wide range, from a 40% loss to a 120% gain, the average fund delivered a 42% return compared with only 11% brought in by the average ETF.
However, during the three-year period, the average ETF outperformed the average active fund (a 46% return versus 33%). Factors influencing the results are the opening of China’s stock markets to international investors and the surge of domestic retail investment in funds and stocks, which would drive indices.
Another explanation is that active fund managers had a difficult time manoeuvering the volatility and unpredictability of China A-shares in the late 2014 and 2015, incurring higher losses than index funds.
Returns of China equity mutual funds and ETFs
Data: FE, as of 30 June 2017. Funds available for sale in Hong Kong and Singapore. Returns in US dollars.
With China’s stock market relatively peaceful during the past year, actively-managed mutual funds again outperformed ETFs on average, although the difference is smaller: 24% vs 19%.
For all three periods, the range of ETF returns was more narrow than that of active funds.
In each period, the best active mutual fund outperformed the best ETF. However, conversely, the worst active fund underperformed the worst index ETF.
Bearing in mind the simplicity of the analysis, FSA would venture a conclusion that in quiet and predictable markets, active fund managers deliver better returns than index funds, but they lag behind ETFs in turbulent and unpredictable ones.
