Do actively managed mutual funds deliver positive risk-adjusted performance in emerging markets? The case of South African equity unit trusts

Abstract

As passive investing gains traction, an important question is whether active fund manager performance justify the fees charged. South Africa’s investment industry is arguably the most developed in Africa, and this study therefore investigates whether actively managed South African equity unit trusts, both on average and individually, delivered positive excess returns, gross and net of fees, over the period 2003 to 2019. Using monthly fund returns for an unbalanced panel of the 93 actively managed SA equity funds in existence for at least three years during this period, industry average and individual fund alphas are determined, gross and net of fees, in terms of four well-established multifactor asset pricing models, namely the CAPM, the Fama-French Three-Factor Model, the Carhart Four-Factor Model, and the Fama-French Five-Factor Model. The study finds that, at an industry level, the average actively managed South African equity unit trust underperforms on a risk adjusted basis, delivering a statistically significant negative alpha in most multifactor models, both gross and net of fees. Further, depending on which model was used, between 67% and 92% of funds in the sample did not deliver positive excess returns after fees over the period. This suggests that the performance of most South African actively managed equity funds may not justify the fees charged to investors and supports the case for increased passive equity investing.