The majority (54 per cent) of funds across all Australian fund categories underperformed their benchmarks in the six months to June 2024, new data from SPIVA has revealed.

According to SPIVA’s Global Scorecard, the first half of the year proved to be a particularly challenging market environment for active managers in developed capital markets, with the outperformance of mega caps resulting in a high proportion of index constituents outperforming their benchmarks.

Specifically, 72 percent of actively managed global common equity funds underperformed the S&P World Index’s total return of 14.9 percent, posting an average asset-weighted return of 11.8 percent.

With the country's local share market setting the bar significantly lower, with a 4.2% return for the S&P/ASX 200 over the same period, Australia's domestic share funds have fared slightly better.

Namely, 48 per cent of Australian common equity funds underperformed the benchmark, but this figure rises to 66 per cent when looking at one-year returns to June 2024.

Vanguard's chief investment officer Duncan Burns described the result as "dismal".

"But the story gets even worse over longer periods," Duncan stressed, noting that over the past three financial years, 70 per cent of Australian equity mutual funds have underperformed their benchmark, with that number rising to over 80 percent after 10 years.

“This is not just an Australian phenomenon. SPIVA's Global Scorecard shows that 75 percent of US active managers underperformed the S&P 500 in the first half of the year, as did 73 percent of active managers relative to the global S&P index,” said the CIO.

According to Burns, what SPIVA's scorecard really highlights is that "most active fund managers are not talented enough or different enough to outperform the stock market." This, he said, explains the rapid acceleration of the flow of investors into index-tracking funds.

"To put it bluntly, Australian investors are increasingly voting with their feet because they realize that using an index fund to get returns from the share market is a much better alternative than using active managers who are very likely to outperform weak from the market,” he said.

Locally, the lion's share of investor inflows into exchange-traded funds (ETFs) continue to go to index funds, now accounting for more than 91 per cent of the Australian ETF industry's total assets.

"There is huge scope for Australian index funds and frankly, there are many Australian investors who could improve their retirement and investment outcomes by gaining index exposure through index ETFs," Burns said.

Bright spots of active management

Conversely, less than a third (32 per cent) of Australian mid- and small-cap equity funds underperformed the S&P/ASX Mid-Small (3.1 per cent).

"The Australian equity mid- and small-cap fund category had its lowest historical levels of underperformance when the return spread between the S&P/ASX MidCap 50 and the S&P/ASX Small Ordinaries was narrow, suggesting a tendency for funds to seek excess returns among the -small stocks,” S&P Global said.

"We will continue to watch how Australian mid- and small-cap managers deal with the potential challenges and opportunities remaining in 2024."

Meanwhile, many active managers in the Australian bond category outperformed other peers.

After a record low rate of underperformance (26 per cent) in 2023, only a third of funds underperformed the S&P/ASX Australian Fixed Interest 0+ index by 0.2 per cent in the first half of 2024.

That number drops to just a quarter when looking at one-year returns.

"With credit spreads narrowing further from the end of the third quarter of 2024, active bond managers appear to be on track for another strong year," the report said.