10 funds that have consistently underperformed over the long term

While I was initially hesitant to pen this piece, given I am not a fan of kicking someone while they are down, it felt wrong not to make investors aware of the funds that have consistently underperformed over the long term. 

Over the last few months, I've been penning several pieces on the Australian funds that have the highest batting averages (or those that have consistently outperformed) over the long term across small and mid-caps, large caps, and global stocks. This article is a little different. 

According to data sourced from Morningstar's database, 10 funds have batting averages of 0% over the last 10 years - meaning, they have underperformed the benchmark in every three-year rolling period, stepped monthly, over the last decade. There are three funds with batting averages of 0% over the last five years - which is measured over one-year rolling periods, also stepped monthly. All the funds with batting averages of 0% over the last five years also had batting averages of 0% over the last 10. 

The batting average data for Australian and global equity funds was calculated against the S&P/ASX 200 Total Return and MSCI World Ex Australia Net Total Return Indices respectively and was sourced from Morningstar’s database. However, it is important to note that not all managers benchmark themselves against these indices. 

We've excluded passive funds from this list given they focus on tracking an index rather than outperforming it. 

Worryingly, 137 active funds have batting averages less than 50 over the last 10 years - meaning, they have underperformed the benchmark at least half of the time over three-year rolling periods over the last decade.

The majority of the funds on this list have been categorised by Morningstar as "blend" or "value funds". And before you say - "But Ally, growth has dominated over the last decade thanks to falling interest rates, so that makes sense!" You should know there are also growth funds that haven't been able to outperform over this period as well. 

This kind of data is important, as studies have shown that there is a strong correlation between the funds that consistently underperform and those that tend to keep underperforming. 

So, without further ado, here is the list of the funds in the Morningstar database with 0% batting averages over the past five and 10 years. All the returns below are as of 30 September 2024. 

And remember, the batting average measure is far from perfect. It does not calculate the extent of a fund's outperformance or underperformance and does not take into account the risk that was taken by managers to receive these returns. It's just a data point in isolation. 

Note: Please drag your cursor across the tables below to see the entire tables. All data below was sourced from Morningstar's database. The categories below are also designated by Morningstar. 

10-year batting average 

5-year batting average 

What you should take away from this data 

This data demonstrates that it is far easier for a manager to outperform over the short term, but over the longer team, the chance of consistent outperformance drops. 

This is supported by S&P Global's SPIVA data, which shows that 83.33% of Australian funds have underperformed the S&P/ASX 200 over the past 10 years. Over the past five years, 77.55% of funds have underperformed the Aussie benchmark. 

In addition, there are no Aussie small to mid-cap funds on this list, which - as explored in the small-cap batting average article - reveals that small-cap managers may have an advantage over their large-cap and global-focused peers when it comes to outperforming over the long term. 

When I last spoke with Morningstar's Associate Director of Manager Research, Steven Le, he argued that there are a few reasons for this. 

"One is the information advantage active managers have in a segment of the market that is comparatively under-researched. This can enable skilled managers to uncover and capitalise on insights that are not factored into share prices," he said.

"Another reason is that the index comprises a considerable amount of lower-quality and speculative stocks with low or negative profitability and cash flow, which active managers can easily avoid, enhancing relative performance."

You may have also noticed that the majority of funds in the above table are globally focused funds - many of which have delivered strong absolute returns over the past 12 months. However, it's important to note that they've underperformed the MSCI World Ex Australia Net Total Return Index's even stronger 23.21% over the 12 months to the end of September. 

Given that the global funds in this table haven't been able to consistently beat the MSCI World Ex Australia Net Total Return Index over rolling three-year periods over the past decade, it may be a safer bet for investors to focus on index-tracking global equities products. 

"The MSCI World Ex Australia Index has proven to be a challenging hurdle for active managers to outperform consistently. The efficiency and liquidity of US equities, which dominate the index, have made it an uphill task," Le added.