Active outcome for passive fees in Australian equities


The correlation of Australian stocks, that is their tendency to move up and down together, is at its lowest level in four years.  Most active managers claim that when there is greater stock dispersion and less correlation it opens the window for achieving outperformance.  However, the recently released SPIVA Australia score card however indicates that this is easier said than done.

One way an active manager will attempt to justify their fees is a measure called ‘active share’ which indicates how much a manager’s portfolio differs from the benchmark index.

High fees can be justified if there is both high active share and outperformance.   There is a way to invest in a portfolio with low fees and as active share is comparable to active managers which has also demonstrated consistent outperformance relative to the S&P/ASX 200 since its inception, beating it by an average of 3.93% per annum since March 2014. 

Australian stock correlations are at an all-time low

Correlation, or the tendency of stocks to move up and down in lockstep, has recently hit its lowest level in four years.  Overall, the 11 sectors in the S&P/ASX 200 are showing just a 53% correlation with the broader index. Exclude financials and that number falls to 49%. That's off a number that was close to 82% two years ago.

Australian sector correlation

That means active managers potentially have more opportunity to find price discrepancies and achieve returns that beat indices like the S&P/ASX 200 Index.  However over the last ten years most active Australian equity managers have struggled to beat the index. 

Australian active equity managers challenged for outperformance

Fund managers that achieving outperformance persistently over time are rare. S&P’s most recent SPIVA Australia scorecard shows that over one, three and five years more than 60% of Australian equity funds underperformed the S&P/ASX 200, and over ten years that number rises to 75%.

SPIVA Australia Scorecard – Australian Equity General

SPIVA - June 2017 - Australian equities

Source: S&P Dow Jones Indices LLC, Morningstar, Data as of 30 June 2017.

VanEck Vectors Australia Equal Weight ETF (MVW) was launched over three years ago and over that time it has outperformed the S&P/ASX 200 Index by over 3.9% per annum.  Being an ETF, MVW is low cost and is being used by savvy investors as a replacement to their active managers. 

Active share for passive fees

One way an active manager will attempt to justify their fees is a measure called ‘active share’ which indicates how much a manager’s portfolio differs from the benchmark index. The higher the score the more active they are and hence high fees could be justified. According to Morningstar the range of ‘active share’ scores compared to the S&P/ASX 200 for Large Cap Australian Active equity managers ranges from 29.6 to 81.1.

MVW has an active share typical of an active manager with an average of 49 since inception.

Active share - MVW

And yet MVW’s management cost is almost a third of the average large cap Australian equity manager.

Australian equity fund manager fees

And it outperforms

MVW Performance October 2017

Important Notice

This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity of the VanEck Vectors Australian Equal Weight ETF (MVW) (‘Fund’). This is general information only and not financial advice. It is intended for use by financial services professionals only. It does not take into account any person’s individual objectives, financial situation nor needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser and consider if it is appropriate for your circumstances. The PDS is available at or by calling 1300 68 3837. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the Fund.

Published: 09 August 2018