Aug 02

A Need for Style Indices and/or more Style Biased Passive Funds

According to Morningstar, the best performing Australian equities fund over the last 10 years is the Dimensional Australia Value Trust. In this competition of winners, where only the biggest or best have survived, the Dimensional fund has outperformed 44 other funds, including those value giants, Perpetual, Tyndall and Investors Mutual and and different styled behemoths like  BT, and Colonial First State. Now Dimensional’s 5 year performance isn’t quite as flash as it ranks only 22nd out of 79 funds but that’s still not bad.

The thing about Dimensional is that its a low cost passive fund whose underlying stocks are arranged to produce a “value” bias in the way the academic gurus, Fama and French, designed many years ago…much of which is in the public domain…i.e. a bias towards low Price/Book stocks. So there is no claim for rocket science and, to a degree, could be fairly easily replicated.

Anyway, well done Dimensional…but…the real issue is, that if a passive style biased fund is number one after an incredible tricky decade that include the tech wreck and the GFC, then active managers have seriously failed. Most of the Australian fund managers are continually compared to the broad market cap weight ASX200 or ASX300 accumulation indices whether they have a style bias or not. Fund managers, like Investors Mutual, Perpetual, and Tyndall, always show their long term results and how they’ve outperformed these market cap weighted indicies but because of their style bias they should be compared to an index that is more reflective of the way they invest money. So if that style is in or out of favour compared to the broader market then their perforamcne can be judged for its true active worth. The same goes for Growth etc.

Twenty years ago, Fama and French showed there is a risk adjusted premium paid for Small Cap and Value stocks over the longer term and for the unsuspecting public (or super trustee etc) to better assess the added value of an actively managed fund its time we had some style biased indices that are a little more publicly available alongside of more style biased passive funds to invest in…particularly for when we (or Jeremy Cooper or his replacement) work out that active alpha does not frequently persist over time or more importantly…with larger inflow.

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