Carnegie Fonder, the Swedish fund provider, has analysed 30 years of performance by its Carnegie Sverigefond to highlight why it believes actively managed portfolios can still beat passively managed portfolios over the very long term.
As a manager, it says its work over the past three decades mean that it has not understood the value of looking to an index, that cannot say anything about an individual company’s qualities, values or outlook. Some players in the market have tried to pass off their work as active managers, charging active fees, but hugging indices, it notes. But there are three key arguments in favour of active management it says: return, risk adjustment and sustainability – an actively managed fund can do better in all three areas, it argues.
To measure this argument, it has looked to its own Sweden equity fund, which has only ever invested in the Stockholm stock market.
Meanwhile, Carnegie Fonder cites the views of Nobel Laureates Eugene Fama and William Sharpe, who have suggested that active managers can only beat indices with luck, and “why pay for luck?”.
While US statistics support the views of these Nobel Laureates, as well as Warren Buffet – just 25% of US active managed funds have beaten their benchmarks over the past 20 years, the Swedish manager says citing data from Vanguard.
However, it is not straightforward to extrapolate the US experience to the Swedish experience, Carnegie adds. It cites a recent survey by business newspaper Dagens Industri, which found that out of 76 Sweden equity funds in the local market, the best performing index fund was down in 36th place over a five year period.
The Carnegie Sverigefond is among the oldest actively managed of its peers. Since 31 December 1987 it has gained 4,318%, against the OMX Stockholm All share (which until 2005 was called the SAX) return of 2,279%. Out of 26 rolling five year periods since 1988, it has beaten the index in 24 periods, Carnegie says, suggesting that indeed there is evidence that an actively managed portfolio can outdo an index.
In terms of the second key point of its overall argument, around risk adjustment, it notes that indices do not adjust for risk in the same way.
Index funds constitute the index including its risk. Any passive manager buys what the index offers, while the active manager can avoid that which looks too risky. Again, in reference to the Carnegie Sverigefond, the manager notes that during six of the seven years in the past 30 when the index has gone down, the fund has gone down less. Risk can be measured; while the SIX Portfolio Return index has offered a Sharpe ratio of 0.53 over the past 10 years, the Sverigefond portfolio has stood at 0.6, the manager says, citing Morningstar data.
Finally, on the point of sustainability, the question is whether active outpaces passive. The debate has shifted, from previously being more led by ethical considerations and exclusion, the discussion is now more about sustainability and how individual companies manage risks associated with, say, climate change, and how the portfolio managers in turn influence holdings in any particular direction as a result. Some managers work on exclusion, others on influencing companies. Carnegie as a house does exclusion, as well as ensuring it votes as an investor to ensure that internationally agreed norms are followed.
Overall, then, Carnegie Fonder argues that while it may be challenging to beat an index in both the short and long term, it is not impossible.
